1
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON,Washington, D.C. 20549
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FORM 10-K
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 Fee Required $250.00
For the fiscal year ended May 31, 1995
OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 FEE REQUIRED $250.00
FOR THE FISCAL YEAR ENDED MAY 31, 1994
OR
/ /
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBERFor the transition period from to
Commission File Number 1-7102
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NATIONAL RURAL UTILITIES COOPERATIVE
FINANCE CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)(Exact name of registrant as specified in its charter)
DISTRICT OF COLUMBIA
(STATE OR OTHER JURISDICTION OF INCORPORATION OR ORGANIZATION)(State or other jurisdiction of incorporation or organization)
52-0891669
(I.R.S. EMPLOYER IDENTIFICATION NUMBER)Employer Identification Number)
WOODLAND PARK
2201 COOPERATIVE WAY, HERNDON, VA 22071
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE, IS(Address of principal executive offices)
(Registrant's telephone number, including area code, is 703-709-6700)
------------------------
SECURITIES REGISTERED PURSUANT TO SECTIONSecurities registered pursuant to Section 12(b) OF THE ACT:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
-------------------------------- ------------------------
7.40% COLLATERAL TRUST BONDS, SERIES A, DUE 2007 NEW YORK STOCK EXCHANGE
9% COLLATERAL TRUST BONDS, SERIES O, DUE 2016 NEW YORK STOCK EXCHANGE
9 1/2% COLLATERAL TRUST BONDS, SERIES T, DUE 1997 NEW YORK STOCK EXCHANGE
8 1/2% COLLATERAL TRUST BONDS, SERIES U, DUE 1998 NEW YORK STOCK EXCHANGE
9% COLLATERAL TRUST BONDS, SERIES V, DUE 2021 NEW YORK STOCK EXCHANGE
INDICATE BY CHECK MARK WHETHER THE REGISTRANTof the Act:
Name of each exchange
Title of each class on which registered
9% Collateral Trust Bonds, Series O, Due 2016 New York Stock Exchange
91/2% Collateral Trust Bonds, Series T, Due 1997 New York Stock Exchange
81/2% Collateral Trust Bonds, Series U, Due 1998 New York Stock Exchange
9% Collateral Trust Bonds, Series V, Due 2021 New York Stock Exchange
Indicate by check mark whether the registrant (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTIONhas filed all reports
required to be filed by Section 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OFor 15(d) of the Securities Exchange Act of
1934 DURING THE PRECEDINGduring the preceding 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS)months (or for such shorter period that the
registrant was required to file such reports), ANDand (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PASThas been subject to
such filing requirements for the past 90 DAYS. YESdays. Yes X NONo .
INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEMIndicate by check mark if disclosure of delinquent filers pursuant
to Item 405 OF REGULATIONof 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 PARTis 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 FORMof this Form 10-K
OR ANY AMENDMENT TO THIS
FORMor any amendment to this Form 10-K.
YESYes X NONo .
THE REGISTRANT HAS NO COMMON OR VOTING STOCK.The Registrant has no common or voting stock.
DOCUMENTS INCORPORATED BY REFERENCE:
NONE
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2
TABLE OF CONTENTS
PART NO. ITEM NO. PAGE
-------- -------- ----
I. 1. Business........................................................... 1
Members............................................................ 1
Loans and Guarantees............................................... 2
General.......................................................... 2
Loan and Guarantee Policies...................................... 6
Long-Term Loans to Utility Members............................ 6
Intermediate-Term Loans to Utility Members.................... 8
Short-Term Loans to Utility Members........................... 8
Loans to Telecommunication Borrowers.......................... 9
Loans to Associate Members.................................... 9
REA Guaranteed Loans.......................................... 10
Guarantees of Pollution Control Facility and Utility Property
Financings.................................................. 10
Guarantees of Lease Transactions.............................. 11
Guarantees of Tax Indemnifications............................ 11
Other......................................................... 11
CFC Financing Factors............................................ 11
Tax Status....................................................... 15
Investment Policy................................................ 15
Other Sources of Loans to CFC Members............................ 15
Employees........................................................ 15
The Rural Electric Systems......................................... 16
General.......................................................... 16
The REA Program.................................................. 16
Distribution Systems............................................. 17
Power Supply Systems............................................. 17
Regulation and Competition....................................... 18
Financial Information............................................ 19
Composite Financial Statements................................... 21
2. Properties......................................................... 25
3. Legal Proceedings.................................................. 25
4. Submission of Matters to a Vote of Security Holders................ 26
II. 5. Market for the Registrant's Common Equity and Related Stockholder
Matters.......................................................... 26
6. Selected Financial Data............................................ 26
7. Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................ 27
8. Financial Statements and Supplementary Data........................ 38
9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure............................................. 38
III. 10. Directors and Executive Officers of the Registrant................. 39
405. Compliance with Section 16(a) of the Exchange Act.................. 42
11. Executive Compensation............................................. 43
12. Security Ownership of Certain Beneficial Owners and Management..... 45
13. Certain Relationships and Related Transactions..................... 45
IV. 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K...Part No. Item No. Page
I. 1. Business 1
Members 1
Loans and Guarantees 2
General 2
Loan and Guarantee Policies 6
Long-Term Loans to Utility Members 6
Intermediate-Term Loans to Utility Members 8
Short-Term Loans to Utility Members 8
Loans to Telecommunication Borrowers 8
Loans to Associate Members 9
RUS Guaranteed Loans 10
Guarantees of Pollution Control Facility
and Utility Property Financings 10
Guarantees of Lease Transactions 11
Guarantees of Tax Benefit Transfers 11
Other 11
CFC Financing Factors 11
Tax Status 15
Investment Policy 15
Other Sources of Loans to CFC Members 15
Employees 15
Rural Electric and Telehone Systems 16
General 16
The RUS Program 16
Distribution Systems 17
Power Supply Systems 17
Telephone Systems 18
Regulation and Competition 18
Financial Information 19
Composite Financial Statements 21
2. Properties 25
3. Legal Proceedings 25
4. Submission of Matters to a Vote of
Security Holders 25
II. 5. Market for the Registrant's Common Equity and
Related Stockholder Matters 26
6. Selected Financial Data 26
7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 27
8. Financial Statements and Supplementary Data 39
9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 39
III.10.Directors and Executive Officers of the Registrant 39
405. Compliance with Section 16(a) of the Exchange Act 43
11. Executive Compensation 43
12. Security Ownership of Certain Beneficial Owners
and Management 45
13. Certain Relationships and Related Transactions 46
iIV.14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K 46
3
PART I
ITEMItem 1. BUSINESS.Business.
National Rural Utilities Cooperative Finance Corporation (the "Company" or
"CFC") was incorporated as a private, not-for-profit cooperative association
under the laws of the District of Columbia in April 1969. The principal
purpose of CFC is to provide its members with a source of financing to
supplement the loan programs of the Rural Electrification AdministrationUtilities Service ("REA"RUS") of the
United States Department of Agriculture. CFC makes loans primarily to its
rural utility system members ("Utility Members") to enable them to acquire,
construct and operate electric distribution, generation, transmission and
related facilities. Most CFC long-term loans to Utility Members have been
made in conjunction with concurrent loans from REARUS and are secured equally
and ratably with REA'sRUS's loans by a single mortgage. CFC also provides
guarantees for tax-exempt financings of pollution control facilities and other
properties constructed or acquired by its members, and, in addition, provides
guarantees of taxable debt in connection with certain lease and other
transactions of its members.
CFC's 1,0391,046 members as of May 31, 1994,1995, included 899903 rural electric Utility
Members,utility
members, virtually all of which are consumer-owned cooperatives, 7172 service
members and 6971 associate members. The Utility Members included 833838
distribution systems and 6665 generation and transmission ("Power Supply")
systems operating in 46 states and U.S. territories. At December 31, 1992,1993,
CFC's member rural electric systems provided service to about 70% of the
contiguous continental land territory of the United States, serving
approximately 12.212.4 million consumers, representing an estimated 28.832.5 million
ultimate users of electricity, and owned approximately $60.8$62.6 billion (before
depreciation of $16.4$17.9 billion) in total utility plant.
Rural Telephone Finance Cooperative ("RTFC") was incorporated as a taxable
cooperative association in the stateState 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 funding for RTFC. See Note 1 to Combined Financial
Statements for summary financial information relating to RTFC at May 31,
1994.1995. As of that date, RTFC had 352388 members.
Guaranty Funding Cooperative ("GFC") was organized in December 1991 as a
taxable cooperative Associationassociation owned by its member rural electric systems and
CFC to provide a source of funds for members to refinance their REARUS guaranteed
debt previously held by the Federal Financing Bank of the United States
Treasury ("FFB"). GFC is a controlled affiliate of CFC (the majority of its
directors are appointed by CFC). All loans from GFC are guaranteed by
REA.RUS. CFC is the sole source of funding for GFC. See Note 1 to Combined
Financial Statements for summary financial information relating to GFC at
May 31, 1994.1995. As of May 31, 1994,1995, GFC had four members.
Except as indicated, financial information presented herein includes CFC, RTFC
and GFC on a combined basis.
National Cooperative Services Corporation ("NCSC") was organized in 1981 as a
taxable cooperative, owned and operated by its member rural electric
distribution systems, to provide specialized financing and services to the
cooperative rural electric industry that CFC could not otherwise provide due to
competitive, regulatory or other reasons. NCSC has an independent Board of
Directors, with CFC providing all management services through a contractual
arrangement. CFC is the source for essentially all of NCSC's financing
capabilities through direct loans or, predominantly, providing credit
enhancements (guarantees) of debt issued by NCSC in the public and private
credit markets. NCSC's financial statements are not combined or consolidated
with CFC's.
MEMBERSMembers
CFC currently has five classes of members: Class A -- cooperativeA_cooperative or nonprofit
distribution systems; Class B -- cooperativeB_cooperative or nonprofit power supply systems
which are federations of Class A or other Class B members; Class C -- statewideC_statewide
and regional associations which are wholly-owned or controlled by Class A or
1
4
Class B members; Class D -- nationalD_national associations of cooperatives; and Associate
Members -- nonprofitMembers_nonprofit groups or entities organized on a cooperative basis which
are owned, controlled or operated by Class A, B or C members and which
provide nonelectric services primarily for the benefit of ultimate consumers.
Associate Members are not entitled to vote at any meeting of the members and
are not eligible to be represented on CFC's Board of Directors.
4
Membership in RTFC is limited to CFC and commercial or cooperative corporations
eligible to receive loans or other assistance from REARUS and which are engaged
(or plan to be engaged) in providing telephone or telecommunication services
to ultimate users and affiliates of such corporations.
Membership in GFC is limited to CFC and cooperative or nonprofit Utility
Member systems who have refinanced all or a portion of their FFB debt
through CFC.
Set forth below is a table showing by state or U.S. territory, at May 31, 1994,1995,
the total number of CFC, RTFC and GFC members (memberships in each other
have been eliminated and corporations which belong to more than one of CFC,
RTFC and GFC have been counted only once), the percentage of loans and the
percentage of loans and guarantees outstanding.
Number Loan and Number Loan and
NUMBER LOAN AND
OF LOAN GUARANTEE
MEMBERSof Loan Guarantee of Loan Guarantee
members % % ------- ----- ---------members % %
Alabama.............. 30 1.9% 2.2%
Alaska............... 23 1.2% 0.8%
American Samoa....... 1 0.0% 0.0%
Arizona.............. 19 1.0% 1.1%
Arkansas............. 26 3.4% 5.4%
California........... 10 0.3% 0.2%
Colorado............. 32 4.1% 4.2%
Delaware............. 1 0.3% 0.2%
District of
Columbia........... 6 1.0% 0.7%
Florida.............. 21 5.2% 8.1%
Georgia.............. 64 6.8% 4.7%
Guam................. 1 0.0% 0.0%
Idaho................ 14 0.6% 0.4%
Illinois............. 51 9.1% 6.3%
Indiana.............. 54 1.7% 2.7%
Iowa................. 92 2.1% 1.6%
Kansas............... 47 3.5% 3.0%
Kentucky............. 35 2.6% 3.9%
Louisiana............ 15 2.0% 1.4%
Maine................ 10 0.0% 0.0%
Maryland............. 2 1.1% 1.2%
Massachusetts........ 1 0.0% 0.0%
Michigan............. 23 0.9% 0.6%
Minnesota............ 67 3.0% 4.1%
Mississippi.......... 24 3.1% 3.0%
Missouri............. 66 3.6% 6.7%
Montana.............. 35 2.2% 1.6%
Nebraska............. 30 0.3% 0.3%
NUMBER LOAN AND
OF LOAN GUARANTEE
MEMBERS % %
------- ----- ---------
Nevada...............Alabama 32 2.0% 2.2% Nevada 5 0.1% 0.1%
Alaska 28 1.6% 1.2% New Hampshire........ 4 0.1% 0.1%Hampshire 5 0.4% 0.3%
American Samoa 1 0.0% 0.0% New Jersey...........Jersey 1 0.1% 0.1%
Arizona 20 1.1% 1.5% New Mexico........... 16 1.7% 1.2%Mexico 18 1.6% 1.1%
Arkansas 27 3.3% 5.1% New York.............York 14 0.2% 0.1%
California 10 0.2% 0.2% North Carolina.......Carolina 45 4.4% 4.5%3.5% 3.8%
Colorado 32 4.1% 4.2% North Dakota.........Dakota 30 0.2% 0.1%
Ohio................. 31Delaware 1 0.2% 0.2% Ohio 34 1.3% 0.9%
DC 7 1.3% 1.0% Oklahoma 53 3.6% 3.4%
Florida 20 4.6% 6.8% Oregon 36 2.0% 1.5%
Georgia 65 7.4% 5.4% Pennsylvania 21 1.2% 1.1%
Guam 1 0.0% 0.0% South Carolina 36 3.9% 3.4%
Idaho 15 0.6% 0.4% South Dakota 51 0.6% 0.5%
Illinoi 50 6.8% 4.9% Tennessee 22 0.8% 0.6%
Indiana 55 1.6% 2.5% Texas 114 10.5% 9.0%
Iowa 96 2.1% 1.6% Utah 6 2.2% 5.0%
Kansas 49 3.5% 3.0% Vermont 9 1.0% 0.7%
Kentucky 35 2.5% 3.7% Virgin Islands 1 0.7% 0.6%
Louisiana 15 1.8% 1.3% Virginia 19 2.5% 1.8%
Maine 10 0.9% 0.7% Washington 21 1.1% 0.8%
Oklahoma............. 51 3.6% 3.4%
Oregon............... 35 1.9% 1.4%
Pennsylvania......... 21 1.3%Maryland 2 1.1% South Carolina....... 33 4.1% 3.5%
South Dakota......... 47 0.7% 0.5%
Tennessee............ 22 0.9% 0.6%
Texas................ 110 9.5% 7.8%
Utah................. 6 2.1% 5.3%
Vermont.............. 8 0.2% 0.1%
Virgin Islands....... 1 0.9% 0.6%
Virginia............. 20 2.9% 2.0%
Washington........... 21 1.3% 0.9%1.2% West Virginia........Virginia 3 0.0% 0.0%
Wisconsin............ 49Massachusetts 1 0.0% 0.0% Wisconsin 50 1.3% 1.0%
Wyoming..............1.1%
Michigan 23 1.1% 0.8% Wyoming 18 0.4% 0.3%
------- ----- ---------
Sub-Total........ 1,3911.5% 1.1%
Minnesota 69 3.3% 4.2% Sub-Total 1,434 100.0% 100.0%
===== ==========Mississippi 23 2.6% 2.7% Add Duplicates.......Duplicates 4
-------Missouri 66 3.6% 6.3% Total Members........ 1,395
=========Members 1,438
Montana 38 2.1% 1.5%
Nebraska 31 0.3% 0.3%
LOANS AND GUARANTEES
GENERALLoans and Guarantees
General
CFC provides its Utility Members with a source of financing to supplement the
loan programs of REA.RUS. CFC provides the majority of total non-REAnon-RUS direct
funding and guarantees obtained by members. CFC's
2
5 interest rates on loans
to its members are set to reflect the cost of its funds allocated to such
loans, operating and other expenses and a reasonable margin (see "Loan and
Guarantee Policies").
Substantially all long-term and some intermediate-term loans are secured,
while mostsubstantially all short-term loans are unsecured. Long-term loans
generally have maturities of up to 35 years. Fixed rate long-term loans
generally provide for a fixed interest rate for terms of one to 30 years (but
not beyond the maturity of the loan).5
Upon expiration of the term, the borrower may select another fixed rate term
of one to 30 years or a variable rate. Variable rate long-term loans have an
interest rate which varies monthly as determined by CFC. Intermediate- and
short-term loans are made for terms not exceeding 60 months. CFC adjusts
the rate monthly on outstanding short-andshort- and intermediate-term loans. On
notification to borrowers, CFC may adjust the rate semimonthly.
Telecommunication loans are secured long-term fixed or variable rate loans
with maturities generally not exceeding 15 years and short-term unsecured
loans. CFC has also provided guarantees for tax-exempt financings of pollution
control facilities and utility properties constructed or acquired by its
members and for members' obligations under certain lease transactions
(see "Loan and Guarantee Policies").
Set forth below is a table showing loans outstanding to borrowers as of May 31,
1995, 1994 1993 and 1992,1993, and the weighted average interest rates thereon and loans
committed but unadvanced to borrowers at May 31, 1994.1995.
LOANS COMMITTED
BUT UNADVANCED AT
LOANS OUTSTANDING AND WEIGHTED AVERAGE INTEREST MAYLoans committed
Loans outstanding and weighted average interest but unadvanced
rates thereon at May 31, 1994
RATES THEREON AT MAYat May 31, (A)1995(A)(B)
--------------------------------------------------------------------- -----------------(Dollar Amounts In Thousands) 1995 1994 1993 1992
----------- ----------- -----------
(DOLLAR AMOUNTS IN THOUSANDS)
Long-term fixed rate secured loans:loans(C):
Distribution Systems(C).......... $ 1,502,454Systems (D) $1,645,551 7.68% $1,502,454 7.69% $ 1,604,275$1,604,275 8.14% $ 2,148,974 8.93% $ 12,089$10,389
Power Supply Systems(C)..........Systems (D) 253,208 7.68% 273,186 7.56% 179,384 7.80% 135,778 8.29% 9,7051,214
Service Organizations(C)Organizations (D)......(E) 81,521 9.27% 94,104 9.53% 90,090 9.85% 94,183 9.79% 11,4612,600
Associate Members................Members 1,569 10.25% 1,606 10.25% 1,628 10.25% 1,648 10.25% --0
Telecommunication Organizations..................Organizations 141,144 8.98% 119,600 9.16% 130,552 9.33% 104,350 9.84% --
----------- ----------- ----------- -----------------0
Total long-term fixed rate
secured loans............loans 2,122,993 7.83% 1,990,950 7.85% 2,005,929 8.27% 2,484,933 8.97% 33,255
----------- ----------- ----------- -----------------14,203
Long-term variable rate secured loans(E)loans (F):
Distribution Systems.............Systems 2,553,590 6.50% 2,172,799 4.65% 1,975,784 4.63% 1,320,823 5.28% 807,848730,453
Power Supply Systems.............Systems 191,967 6.50% 170,683 4.65% 178,095 4.63% 221,552 5.25% 436,147512,598
Service Organizations(D).........Organizations (E) 53,332 6.50% 39,487 4.65% 43,014 4.63% 6,931 5.25% 64,82867,887
Associate Members................Members 42,561 6.20% 29,089 4.45% 26,098 4.38% 27,734 5.00% 47,41239,959
Telecommunication Organizations..................Organizations 704,427 6.64% 499,506 4.92% 288,234 4.75% 282,082 5.38% 366,269
----------- ----------- ----------- -----------------130,627
Total long-term variable rate
secured loans.......loans 3,545,877 6.52% 2,911,564 4.69% 2,511,225 4.64% 1,859,122 5.28% 1,722,504
----------- ----------- ----------- -----------------1,481,524
Refinancing variable rate loans guaranteed by
REA:RUS:
Power Supply Systems.............Systems 429,129 7.27% 533,545 4.87% 297,724 3.94% 287,324 5.21% --
----------- ----------- ----------- -----------------0
Intermediate-term secured loans:
Distribution Systems.............Systems 4,176 6.85% 4,112 4.90% 320 4.75% 412 5.38% 2,0002,300
Power Supply Systems.............Systems 40,237 6.85% 21,316 4.90% 28,496 4.75% 152,871 5.38% 234,391158,759
Service Organizations............Organizations 11,429 6.85% 2,099 4.90% 496 4.75% 1,501 5.38% 5,5413,705
Telecommunication Organizations.................. -- -- -- -- -- -- --
----------- ----------- ----------- -----------------Organizations 0 0 0 0 0 0 0
Total intermediate-term secured
loans............loans 55,842 6.85% 27,527 4.90% 29,312 4.75% 154,784 5.38% 241,932
----------- ----------- ----------- -----------------164,764
Intermediate-term unsecured loans:
Distribution Systems.............Systems 11,392 6.50% 13,046 4.90% 10,873 4.75% 31,443 5.38% 10,69517,693
Power Supply Systems.............Systems 47,443 6.50% 84,515 4.90% -- -- 2,740 5.38% 22,3760 0 3,856
Service Organizations............ -- --Organizations 0 0 0 0 11 4.75% 27 5.38% 700
Telecommunication Organizations..................Organizations 3,255 7.54% 1,265 5.05% -- -- -- -- 1,303
----------- ----------- ----------- -----------------0 0 2,370
Total intermediate-term unsecured
loans..........loans 62,090 6.56% 98,826 4.90% 10,884 4.75% 34,210 5.38% 34,444
----------- ----------- ----------- -----------------23,919
Short-term loans(F)loans (G):
Distribution Systems.............Systems 445,962 6.85% 276,373 4.90% 151,941 4.75% 130,891 5.43% 1,943,3352,032,220
Power Supply Systems.............Systems 10,267 6.85% 14,048 4.90% 14,157 4.75% 3,438 5.38% 962,2241,042,205
Service Organizations............Organizations 25,653 6.85% 11,812 4.90% 11,873 4.75% 14,335 5.38% 66,46346,787
Associate Members................Members 7,651 6.85% 3,084 4.90% 1,856 4.75% 2,952 5.38% 16,20113,524
Telecommunication Organizations..................Organizations 34,637 7.60% 31,176 5.65% 21,370 5.50% 26,032 6.13% 114,172
----------- ----------- ----------- -----------------198,636
Total short-term loans.....loans 524,170 6.90% 336,493 4.97% 201,197 4.83% 177,648 5.52% 3,102,395
----------- ----------- ----------- -----------------3,333,372
Nonperforming loans(H):
Distribution Systems 1,830 7.21% 1,933 8.27% 11,164 10.20% 0
Power Supply Systems 25,811 6.57% 27,948 4.75% 29,584 4.75% 0
Associate Members 0 0 12,961 9.00% 12,963 9.00% 0
Telecommunication Organizations 0 0 2,098 6.13% 2,117 9.00% 0
Total nonperforming loans 27,641 6.61% 44,940 6.19% 55,828 6.99% 0
3
6
LOANS COMMITTED
BUT UNADVANCED AT
LOANS OUTSTANDING AND WEIGHTED AVERAGE INTEREST MAYLoans committed
Loans outstanding and weighted average interest but unadvanced
rates thereon at May 31, 1994
RATES THEREON AT MAYt May 31, (A)1995(A) (B)
--------------------------------------------------------------------- -----------------(Dollar Amounts In Thousands) 1995 1994 1993 1992
----------- ----------- -----------
(DOLLAR AMOUNTS IN THOUSANDS)
Nonperforming loans(G)Restructured loans(I):
Distribution Systems.............Systems $ 1,933 8.27%2,654 18.37% $ 11,164 10.20%2,667 18.37% $ 11,797 9.76%0 0 $ --0
Power Supply Systems............. 27,948 4.75% 29,584 4.75% 5,225 5.38% --
Associate Members................ 12,961 9.00% 12,963 9.00% -- -- --
Telecommunication
Organizations.................. 2,098 6.13% 2,117 9.00% -- -- --
----------- ----------- ----------- -----------------
Total nonperforming
loans.................... 44,940 6.19% 55,828 6.99% 17,022 8.42% --
----------- ----------- ----------- -----------------
Restructured loans(H):
Distribution Systems............. 2,667 18.37% -- -- -- -- 3,000
Power Supply Systems.............Systems 180,521 9.01% 160,873 8.32% 149,685 7.86% 130,541 7.58% 50,00020,000
Service Organizations............Organizations 1,803 6.50% 1,833 4.62% 2,000 4.63% -- -- --0
Associate Members................ -- --Members 0 0 2,666 4.46% 12,963 5.00% --2,666 4.46% 0
Telecommunication Organizations.................. -- --Organizations 0 0 0 0 18,592 4.77% 2,119 5.38% --
----------- ----------- ----------- -----------------0
Total restructured loans...loans 184,978 9.12% 165,373 8.44% 172,943 7.43% 145,623 7.32% 53,000
----------- ----------- ----------- -----------------20,000
Total loans................loans 6,952,720 7.01% 6,109,218 5.87% 5,285,042 6.10% 5,160,666 7.13% 5,187,530
----------- ----------- ----------- -----------------5,037,782
Less: Allowance for loan and
guarantee losses.................losses 205,596 188,196 172,571
157,571 --
----------- ----------- ----------- -----------------
Net loans.................. $ 5,921,022 $ 5,112,471 $ 5,003,095 $ 5,187,530
========= ========= ========= ==============loans $6,747,124 $5,921,022 $5,112,471 $5,037,782
- - ---------------
(A) The interest rates in effect at August 1, 1994,1995, for loans to electric
members were 8.15%7.35% for long-term loans with a seven-year fixed rate term,
5.15%6.40% on variable rate long-term loans and 5.40%6.60% on intermediate-andintermediate- and
short-term loans. The rates in effect at August 1, 1994,1995, on loans to
associate members were 8.15%7.65% for long-term loans with a seven-year fixed
rate term 4.90%loans, 6.40% on long-term variable rate loans and 5.40%6.60% on
short-term loans. The rates in effect at August 1, 1994,1995, on loans to
telecommunication organizations were 8.75%7.80% for long-term loans with a
seven-year fixed rate term, requiring a 10% equity investment, 8.60% for
long-term loans with a seven-year fixed rate term requiring a 5% equity
investment, 5.35%6.55% on long-term variable rate loans, requiring a 10% equity
investment, 5.20% on longterm variable rate loans requiring a 5% equity
investment, 5.60%6.80%
on intermediate-term loans and 6.15%7.15% on short-term loans.
(B) Unadvanced commitments include loans approved by CFC for which loan
contracts have not yet been executed or for which loan contracts have been
executed, but funds have not been advanced. Long-term unadvanced loan
commitments that do not have an interest rate associated with the
commitment have been listed under the variable rate. Rates, fixed or
variable, will be set at the time of advance, on the amount of the
advance.
(C) Included in long-term fixed rate secured loans are $30.4 million of
unsecured loans at May 31, 1995.
(D) During calendar year 1995, $141.81996, $134.5 million of such outstanding fixed rate
loans, which currently have a weighted average interest rate of 7.99%7.96% per
annum, will become subject to rate adjustment. During the first quarter
of calendar year 1994,1995, long-term fixed rate loans totaling $52.9$26.2 million
had their interest rates adjusted. These loans will be eligible to
readjust their interest rate again during the first quarter of calendar
year 19951996 to the lowest long-term fixed rate offered during 19941995 for the
term selected. At January 1 and May 31, 1994,1995, the seven-year long-term
fixed rate was 6.55%8.80% and 8.00%7.20%, respectively.
(D)(E) CFC had loans outstanding to NCSC in each of the periods shown. Long-term
fixed rate loans outstanding to NCSC as of May 31, 1995, 1994 and 1993,
and 1992, were $48.5 million, $47.8 million $49.0 million and $50.2$49.0 million, respectively. In
addition, as of May 31, 1995 and 1994, CFC had unadvanced long-term fixed
rate and long-term variable rate loan commitments to NCSC in the amounts
of $5.0$12.3 million and $9.7$14.7 million, respectively.
(E)(F) Included in long-term variable rate secured loans are $41.4 million, $3.5
million and $2.5 million and $2.6 million inof unsecured loans to one borrower at May 31, 1995, 1994 1993 and 1992.
(F)1993.
(G) All short-term loans are unsecured, except for $30.9 million, $18.2 million
and $31.6 million and $23.2 million inof loans outstanding at May 31, 1995, 1994 1993 and 19921993 that
are secured.
(G)(H) The rates on nonperforming loans are the weighted average of the stated
rates on such loans as of the dates shown and do not necessarily relate
to the interest recognized by CFC from such loans.
(H)(I) The rates on restructured loans are the weighted average of the effective
rates (based on the present value of scheduled future cashflows) as of the
dates shown and do not necessarily relate to the interest recognized by CFC
on such loans.
4
7
Set forth below are the weighted average interest rates earned by CFC
(recognized in the case of nonperforming and restructured loans) on all
loans outstanding during the fiscal years ended May 31.
INTEREST RATES EARNED ON LOANS
1995 1994 1993 1992
----- ----- -----
Long-term fixed rate.........................rate 8.63% 8.63% 9.15%
9.16%
Long-term variable rate......................rate 5.90% 4.08% 4.99%
6.09%
Telecommunication organizations..............organizations 6.70% 5.58% 6.32% 7.26%
Refinancing loans guaranteed by REA..........RUS 6.07% 4.01% 4.09%
5.97%
Intermediate-term............................Intermediate-term 6.19% 4.41% 4.93%
6.03%
Short-term...................................Short-term 6.29% 4.38% 5.08%
6.18%
Associate members............................members 5.40% 4.21% 4.74%
6.09%
Nonperforming................................Nonperforming 1.56% 1.19% 1.26%
7.96%
Restructured.................................Restructured 1.92% 2.33% 1.92%
3.52%
All loans.....................loans 6.72% 5.66% 6.54% 7.86%
At May 31, 1994,1995, CFC's ten largest borrowers,exposures, which were all Power Supply
members, had outstanding loans from CFC totaling $461.6$381.8 million (excluding
$394.1$380.0 million of loans guaranteed by REA)RUS), which represented approximately
7.5%5.5% of CFC's total loans outstanding. As of May 31, 1994,1995, outstanding CFC
guarantees for these same ten largest borrowers totaled $2,117.7$2,051.8 million which
represented 79.2%79.3% of CFC's total guarantees outstanding, including guarantees
of the maximum amounts of lease obligations at such date. On that date, no
member had outstanding loans and guarantees in excess of 10% of the aggregate
amount of CFC's outstanding loans and guarantees; however, one of the ten
largest borrowers, Deseret Generation & Transmission Co-operative ("Deseret"),
was in financial difficulty (see Note 10 to Combined Financial Statements).
At May 31, 1994,1995, loans outstanding to Deseret (excluding loans guaranteed by
REA)RUS) accounted for 1.8%1.9% of total loans outstanding and guarantees outstanding
to Deseret accounted for 12.6%12.5% of total guarantees outstanding. Total loans
and guarantees outstanding to Deseret equaled 26.8%26.6% of total Members' Equity,
Members' Subordinated Certificates and the allowance for loan and guarantee
losses.
Set forth below is a table showing CFC's guarantees as of the dates indicated.
Substantially all guarantees have been provided on behalf of Power Supply
members.
CFC MEMBER GUARANTEES
MAYMay 31,
--------------------------------------1995 1994 1993
1992
---------- ---------- ----------
(DOLLAR AMOUNTS IN THOUSANDS)(Dollar Amounts In Thousands)
Long-term tax-exempt bonds...............................bonds $1,496,930* $1,494,200* $1,576,230* $1,618,880*
Debt portions of leveraged lease transactions............transactions 568,662 646,472 700,841 739,303
Indemnifications of tax benefit transfers................transfers 389,755 414,512 436,860
404,680
Other guarantees.........................................guarantees 119,575 100,643 99,800
113,211
---------- ---------- ----------
Total.....................................Total $2,574,922 $2,655,827 $2,813,731 $2,876,074
========= ========= =========
- - ---------------
* Includes $1,200.1 million, $1,214.6 million $1,120.8 million and $1,068.0$1,120.8 million at May 31,
1995, 1994 1993 and 1992,1993, 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 $376.7 million, $382.9 million $358.6 million and $361.4$358.6
million of such bonds outstanding at May 31, 1995, 1994 1993 and 1992,1993,
respectively, at any time on seven days' notice, in the case of $254.5
million, $289.5 million $233.2 million and $236.3$233.2 million outstanding at May 31, 1995, 1994
1993 and 1992,1993, 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
5
8 basis). CFC has
agreed to purchase any such bonds that cannot be remarketed. Since the
inception of the program CFC has not been required to purchase any such
bonds.8
Loan Contingencies
CFC maintains a loan and guarantee loss allowance to cover losses that may be
incurred in the course of lending or extending credit enhancements. The
allowance is periodically evaluated by management with the Board of Directors.
CFC classifies a loan as nonperforming if interest or principal payments are
contractually past due 90 days or more, repayment in accordance with the
original terms is not expected due to court order or ultimate repayment is
otherwise not expected. Loans in which the original terms have been modified
as a result of a borrower's financial difficulties are classified as
restructured. Interest income on nonperforming loans is recognized on a cash
basis as long as CFC believes the collateral value supports the outstanding
principal balance.
LOAN AND GUARANTEE POLICIESLoan and Guarantee Policies
Long-Term Loans to Utility Members
CFC makes long-term loans to both distribution and power supply members.
CFC's financial tests for determining the eligibility of a Utility Member
initially to receive a long-term loan from CFC historically included two ratios, the
Times Interest Earned Ratio ("TIER") and the Debt Coverage Ratio ("DSC").
TIER is the ratio of (x) net margins and patronage capital as defined under
"The Rural Electric Systems -- FinancialSystems_Financial Information" plus interest on longtermlong-term
debt (including all interest charged to construction) to (y) interest on
long-term debt (including all interest charged to construction). DSC is the
ratio of (x) net margins and patronage capital plus interest on long-term debt
(including all interest charged to construction) plus depreciation and
amortization expense to (y) long-term debt service obligations. In applying
the tests, obligations under contracts providing for payment whether or not
the purchaser in fact receives electric power from the seller, guarantees and
other contingent obligations are not considered debt, nor is interest on the
proposed CFC loan given effect. In determining the eligibility of a member
for a longtermlong-term loan, each of the above ratios is averaged for the best two of
three calendar years preceding the date of determination, resulting in the
"Average TIER" and "Average DSC".
Under CFC's historical lending policy, a member distribution system with an
Average TIER and an Average DSC of at least 1.50 and 1.25, respectively, was
generally eligible for a long-term mortgage loan from CFC. Under new lending
criteria, established in early 1994, distribution systems must instead
generally achieve an Average Modified DSC (as described herein) of 1.35.
The new DSC (also called the "Modified DSC" or "MDSC") calculation is the
ratio of (x) operating margins and patronage capital plus interest on long-term
debt (including all interest charged to construction) plus depreciation and
amortization expense plus Non-operating Margins-Interest plus cash received
in respect of generation and transmission and other capital credits to (y)
longtermlong-term debt service obligations. The distributionDistribution systems will also be
required to have achieved a 20% ratio of equity to total assets at the end of
the preceding calendar year (the "Equity" test). to be eligible collateral for
pledging under the 1994 Collateral Trust Bond Indenture. The average MDSC is
computed using the average of the best two of three calendar years' ratios
preceding the date of determination. The borrower is required to maintain
these ratios at or above the minimum loan eligibility requirements as long as
there is a balance outstanding on the loan.
Under present REARUS policy, a system which meets the REARUS concurrent mortgage
requirement for Average TIER and Average DSC, 1.50 and 1.25, respectively,
will generally be required to borrow a portion of its financial requirements
from a supplemental lender. The extent of the supplemental loan required
generally reflects the revenue productivity of the borrower's investment in
plant, as measured by the ratio of its investment in plant to its operating
revenues (the "plant-revenue ratio"). REARUS regulations, however, permit
borrowers which meet certain rate disparity, consumer income or extremely high
rate tests to qualify for 100% REARUS loans. Further, the Administrator of REARUS
has the authority to approve 100% REARUS loans according to new qualifications
established in 1993, or at his/her discretion on a case-by-case basis.
6
9
It is anticipated that many CFC loans to distribution systems will continue to
be made in conjunction with loans by REA.RUS. However, in addition to making
concurrent loans, CFC's loan policy permits it to make 100% loans to member
systems which meet the applicable minimum borrowing requirements. As of May
31, 1994,1995, CFC had a total of $407.7$1,112.6 million in long-term loans committed and
outstanding to 2646 Utility Members which did not have long-term REARUS loans
outstanding. These systems have either prepaid their REARUS loans or have never
incurred any REARUS debt.9
Under CFC policy, a member Power Supply system having Average TIER and Average
DSC of at least 1.0 in each case is eligible for a long-term loan from CFC.
Loans have been made both for additions to or acquisition of existing power
supply facilities and in connection with the construction of new power supply
projects. Loans have also been made in connection with the termination costs
associated with certain plant construction for cancelled power supply projects.
However, most loans to CFC member Power Supply systems for new generating
plants and transmission facilities have been made by other lenders (principally
the FFB, which has typically offered rates lower than CFC's) under repayment
guarantees from REA,RUS, with REA'sRUS's rights as guarantor secured by a mortgage on
the system's properties.
Under the REARUS mortgage, distribution borrowers are required to design their
rates to cover all operating expenses, including all payments in respect of
principal and interest on notes when due, provide and maintain reasonable
working capital and to maintain a TIER of not less than 1.5 and a DSC of not
less than 1.25.
CFC has made and may continue to approve long-term secured loans to borrowers
which fall below CFC's loan eligibility requirements. Such loans are made on
a case-by-case basis, based upon the submission by the borrower of, among
other things, a long-range financial forecast which indicates that the
borrower will, in future years, meet the applicable minimum borrowing
requirements. During the past five years, such loans accounted for 3.5%4.2% of
the total dollar amount of loans approved. While certain borrowers may not
meet the minimum eligibility requirements at the time of loan approval, such
borrowers may meet the minimum eligibility requirements by the time the loan
is fully advanced.
The rate charged for long-term fixed rate mortgage loans is designed to reflect
CFC's estimated overall cost of fixed rate capital allocated to its fixed rate
mortgage loans (including Capital Term and other Subordinated Certificates,
Collateral Trust Bonds, Medium-Term Notes, variable rate borrowings supported
by Interest Rate Exchange Agreements and Members' Equity) plus increments
estimated to cover general and administrative expenses, a provision for loan
and guarantee losses and a reasonable margin.
Long-term fixed rate loans provide for a fixed interest rate of periods for
one to 30 years. Upon expiration of the interest rate period, the borrower
may select another fixed rate term of one to 30 years (but not beyond the
maturity of the loan) or in certain instances may repay the loan or convert
to another interest rate program.
The rate on long-term fixed rate loans is set at the time of advance. In the
event that there is more than one advance, each advance will receive the fixed
rate in effect at the time of advance for the selected maturity period.
Long-term fixed rate loans approved prior to May 31, 1984 had the fixed rate
set at the time the loan was approved. Long-term fixed rate loans approved
between May 31, 1984 and December 31, 1987 bear the applicable fixed rate in
effect at the time of the first advance.
CFC also makes long-term loans with variable interest rates. Such loans are
funded primarily from available short-term sources, and the rate is adjusted
monthly to reflect CFC's cost of capital raised to fund these loans plus
increments estimated to cover general and administrative expenses, a provision
for loan and guarantee losses and the maintenance of a reasonable margin.
A borrower may convert a long-term loan from the variable rate to a fixed
rate at any time with no fee. Some fixed rate loans may be converted to
variable rate loans at any time, subject to the payment of a conversion fee
and in certain cases regulatory approval.
Prepayment of concurrent loans, where permitted by CFC and REA,RUS, or otherwise
agreed to by CFC and REA,RUS, will be apportioned pro-rata between REARUS and CFC
based on the respective balances of their concurrent loans outstanding as of
the date of prepayment. Prior to January 1, 1994, no fee was required on the
prepayment of a standard seven-year fixed rate loan that was prepaid during a
repricing cycle. Now all prepayments except those required to maintain the
original REA/RUS/CFC concurrent loan proportions will be subject to a prepayment
fee.
Until December 1993, most long-term borrowers were required to purchase from
CFC subordinated loan capital term certificates in an amount up to 7% of the
loan amount. These certificates amortize along with the loan. For all loans
advanced after December 1993, distribution systems may be required to purchase
subordinated loan capital term certificates in an amount up to 3% of the loan
amount or may not be required to 7
10
purchase any certificates depending upon the
borrower's leverage ratio with CFC (the ratio of the outstanding and available
loan funds to subordinated certificates and allocated but unretired patronage
capital), including the new loan. Power supplySupply members are required to
purchase the certificates in amounts up to 12%10% of the loan amount.
Beginning with loan applications received after May 31, 1984, the initial
interest rate for all advances is fixed when loan funds are first advanced.
Initial rates for loans approved prior to such date were fixed at the time of
CFC's approval, which generally preceded the first advance by at least a year.
Beginning with loans approved after December 31, 1987, each advance made under a
long-term fixed rate loan commitment bears the fixed interest rate in effect at
the time of the advance.10
CFC long-term loans made in conjunction with concurrent REARUS loans are generally
for terms of 35 years and under present policy are payable, after a short
period during which interest only is payable, in level quarterly installments
which include both accrued interest and a portion of the principal.
Substantially all of CFC's present long-term mortgage loans to Utility Members
are secured by a first mortgage lien upon all property (other than office
equipment and vehicles) at any time owned by the borrower and future revenue.revenues.
In the case of members whose property is already subject to a mortgage to REA, REARUS,
RUS approval of the loan is required, even in the case of a 100% CFC loan, in
order to accommodate REA'sRUS's mortgage lien so that CFC may share ratably in the
security provided by the mortgaged property. CFC and REARUS are then mortgagees
in common, entitled to the security in proportion to the unpaid principal
amounts of their respective loans. Mortgages do not require that the value of
the mortgaged property be equal to the obligations secured thereby.
Events of default under the long-term mortgages include default in the payment
of the mortgage notes, default (continuing after grace periods in some cases)
in the performance of the covenants in the loan agreements or the mortgages,
and events of bankruptcy and insolvency. Under common mortgages securing
long-term CFC loans to distribution system members, REARUS has the sole right to
exercise remedies on behalf of all holders of mortgage notes for 30 days after
default. If REARUS does not act within 30 days or if REARUS is not legally entitled
to act on behalf of all noteholders, CFC may exercise remedies. Under common
mortgages securing long-term CFC loans to, or guarantee reimbursement
obligations of, power supply members, REARUS retains substantial control over the
exercise of mortgage remedies.
Intermediate-Term Loans to Utility Members
Intermediate-term loans are made to members for terms of up to five years.
The interest rates on intermediate-term loans are adjusted monthly (and may be
adjusted semimonthly) to cover CFC's cost of capital raised to fund these
loans plus increments estimated to cover general and administrative expenses,
a provision for loan and guarantee losses and the maintenance of a reasonable
margin. Intermediate-term loans that are classified as secured are secured by
a first mortgage lien upon all property (other than office equipment and
vehicles) at any time owned by the borrower and future revenue.revenues. Borrowers
are generally not required to purchase additional subordinated certificates
in CFC in conjunction with an intermediate-term loan.
Short-Term Loans to Utility Members
CFC makes short-term line of credit loans to its member distribution systems
in amounts based on the system's monthly operation and maintenance expenses
and prior year's additions to plant. Power supplySupply systems are eligible for
lines of credit in amounts up to a maximum of $50 million, based on the
system's quarterly operation and maintenance expenses. Loans made to
distribution and power supplyPower Supply systems under such lines of credit are generally
unsecured; are for a term not exceeding 12 months for power supplyPower Supply systems and
not exceeding 60 months for distribution systems; and may be prepaid without
premium and reborrowed in whole or in part during such term. Short-term loans
with terms greater than 12 months are required to be paid down to a zero
balance for five consecutive business days during each 12 month12-month period.
The interest rates on short-term line of credit loans are adjusted monthly
(and may be adjusted semimonthly) to cover CFC's cost of capital raised to
fund these loans plus increments estimated to cover general and administrative
expenses, a provision for loan and guarantee losses and the maintenance of a
8
11
reasonable margin. Borrowers are not required to purchase additional
subordinated certificates in CFC in conjunction with a short-term loan.
Loans to Telecommunication Borrowers
RTFC makes long-term loans to rural telecommunication companies for the
acquisition of telecommunication systems and the construction or upgrade of
telephone, cellular and cable television systems.systems as well as other legitimate
corporate purposes.
11
Under RTFC policy, a telephone system with an Average DSC and an Average TIER
of 1.25 and 1.50, respectively, is eligible for a long-term mortgage loan from
RTFC. A cable television system with an Average DSC of 1.25 is eligible for a
long-term mortgage loan. A cellular telephone system is eligible for an
initial long-terma long-
term mortgage loan if it can demonstrate the ability to achieve an Average DSC
of 1.10 prior toby the fifth year of operations, and maintain that requirement annually
thereafter.
Security for RTFC long-term loans made to REARUS borrowers will consistconsists of a first
mortgage lien on the assets and revenues of the system on a pari passu basis
with REA.RUS. Security from non-REAnon-RUS borrowers is considered on a case by casecase-by-case
basis but generally a loan will not exceed 80% of the estimated initial value
of the collateral. Long-term loans are made to RTFC borrowers for terms
generally up to 15 years and amortized quarterly over the life of the loan.
Long-term
borrowers areBorrowers with long-term loans approved after May 31, 1995 or with approved
long-term loans that had not been advanced by May 31, 1995 will be required to
purchase subordinated certificatesSubordinated Certificates from RTFC in amounts equal to 5% of the
loan amount. Prior to May 31, 1995, borrowers were required to purchase
Subordinated Certificates in amounts equal to 5% or 10% of the long-term loan
amount, depending on the borrower.borrower classification.
The interest rate on long-term loans can be fixed for the full term of the
loan or for a predetermined period. Alternatively, the borrower may elect a
variable rate which is adjusted monthly (and may be adjusted semimonthly). A
long-term variable rate loan may be converted to a fixed rate at any time. A
long-term fixed rate loan may be converted to a variable rate onlywithout payment
of a fee on a rate adjustment date.date, or at any other time upon payment of a
fee, which is calculated to ensure that RTFC is made whole on the funding
placed for that loan.
RTFC provides intermediate-term equipment financing for periods up to five
years. These loans are provided on an unsecured basis and are used to finance
the purchase price and installation costs of central office equipment, support
assets and other communication products. Intermediate-term equipment
financing loans are generally made to operating telephone companies with an
equity level of at least 25% of total assets and which have achieved a DSC
ratio for each of the previous two calendar years of at least 1.75.
RTFC also provides short-term financing to telecommunication systems for
periods up to 60 months. These short-term loans are typically in the form of
a revolving line of credit which requires the borrower to pay off the balance
for five consecutive business days at least once during each 12 month12-month period.
These loans are provided on an unsecured basis and are used primarily for
normal operating expenses.cash management. Lines of credit are available to telecommunication
systems generally in amounts not to exceed the greater of five percent of total
assets or 25% of equity in excess of 35% of total assets. Borrowers are not
required to purchase subordinated certificatesSubordinated Certificates in RTFC as a condition to
receiving a line of credit.
RTFC interest rates on all loans are set to cover the cost of funds, plus an
increment estimated to cover general and administrative expenses, a provision
for loan losses and the maintenance of a reasonable margin.
RTFC obtains funding for its loans through back-to-back borrowing from CFC,
which in turn has a security interest in all RTFC's loans.
Loans to Associate Members
CFC also makes loans to Associate Members, which are non-profit or cooperative
organizations owned, controlled or operated by a CFC Class A, B or C Member or
by CFC (sponsor) and engaged primarily in furnishing nonelectric services
within the sponsor's service area. Long-term loans are available to Associate
Members for periods of one to 35 years and are secured by the assets financed
or by a guarantee from a Utility Member, or both. The rate on these loans, to
the extent funding sources are available, may be fixed for the full term of
the loan or for a predetermined period. Alternatively, the borrower may elect
a variable rate which is adjusted monthly (and may be adjusted semimonthly).
Borrowers areAssociate Members with long-term loans approved after May 31, 1995 or with
approved long-term loans that had not been advanced by May 31, 1995 will be
required to purchase a subordinated certificateSubordinated Certificate equal to 5% of the loan amount.
Prior to May 31, 1995, an Associate Member was required to purchase a
Subordinated Certificate equal to 10% of the long-term loan amount.
9
12
CFC also provides short-term loans to Associate Members for periods of up to 60
months. The short-term loans are generally revolving lines of credit which
may require the borrower to pay off the balance for five consecutive business
days during each 12 month12-month period. Borrowers are not required to purchase a
subordinated certificate as a condition to receiving a short-term loan.
Short-term interest rates are set monthly (and may be adjusted semimonthly).
These loans are generally unsecured but are guaranteed by an operating
distribution or power supply member of CFC.
Associate Member interest rates are set to cover the cost of funds plus an
increment estimated to cover general and administrative expenses, a provision
for loan losses and a reasonable margin.
REARUS Guaranteed Loans
In connection with legislation which allowed certain systems to prepay existing
borrowings from FFB without prepayment penalties or fees, CFC established a
program under which it made long-term loans to members for the purpose of
prepaying these loans. Each note evidencing such a loan was issued to a trust
which in turn issued certificates evidencing its ownership to CFC. The
principal and interest payments on these notes are 100% guaranteed by REA.RUS.
Under REARUS regulations, the note rate may not exceed the rate borne by the
system's prepaid borrowings from the FFB adjusted to reflect savings accrued
since prepayment of the note compared with the rate on the prepaid borrowing.
The systems are required to pay service fees to CFC in connection with these
transactions. Most of these loans that have not been sold in public offerings
have been transferred to GFC.GFC ($429.1 million outstanding at May 31, 1995.)
In addition, CFC services $589.1$681.1 million of these loans, held in trustby the trustee,
which have been sold in public offerings.
Guarantees of Pollution Control Facility and Utility Property Financings
CFC has guaranteed debt issued in connection with the construction or
acquisition by CFC members of pollution control, solid waste disposal,
industrial development and electric distribution facilities. Such debt is
issued by governmental authorities and the interest thereon is exempt from
Federal income taxation. The proceeds of the offering are made available to
the member system, which in turn is obligated to pay the governmental authority
amounts sufficient to service the debt. The debt, which is guaranteed by CFC,
may include short-andshort- and long-term obligations.
In the event of a default by a system for nonpayment of debt service, CFC is
obligated to pay any required amounts under its guarantee and the bond issue
will not be accelerated so long as CFC performs under its guarantee. The
system is required to repay, on demand, any amount advanced by CFC pursuant to
its guarantee. This repayment obligation is secured by a common mortgage with
REARUS on all the system's assets, but CFC may not exercise remedies thereunder
for up to two years following default. However, if the debt is accelerated
because of a determination that the interest thereon is not tax-exempt, the
system's obligation to reimburse CFC for any guarantee payments will be treated
as a long-term loan.
In connection with these transactions, the systems generally must purchase
from CFC unsecured subordinated certificatesSubordinated Certificates in an amount up to 12% of the
principal amount guaranteed and maturing at the final maturity of the related
debt (but not less than 20 years). These certificates generally bear interest
at the greater of the 34-year FFB interest rate, the interest rate on the
longest maturity of the debt being guaranteed or 90% of the rate on the loan
from CFC used to purchase the certificate. In addition, if a debt service
reserve fund is created by CFC to secure the debt being issued, the system
buysmust buy an additional subordinated certificate, maturing at the time of the
final maturity of the debt, in the amount of such reserve. No interest is
paid on such certificate, but any earnings from investments held by the
trustee of such debt service reserve funds will be credited against the
system's debt service obligations. The system is also required to pay to CFC
initial and/or on-going servicing fees in connection with these transactions.
Certain guaranteed long-term debt bears interest at variable rates which are
adjusted at intervals of one to 270 days, weekly, each five weeks or
semiannuallysemi-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 may13
be fixed until maturity. Holders have the right to tender for purchase at
par the debt when it bears interest at a variable rate and CFC has committed
to purchase debt so tendered if it cannot otherwise be
10
13 remarketed. While CFC
holds the securities, the cooperative will pay interest to CFC at its
intermediate-term loan rate.
Guarantees of Lease Transactions
CFC has a program of lending to or guaranteeing debt issued by NCSC in
connection with leveraged lease transactions. In such transactions, NCSC has
lent money to an industrial or financial company (a "Lessor") for the purchase
of a power plant (or an undivided interest therein) or utility equipment which
was then leased to a CFC member ("the Lessee") under a lease requiring the
Lessee to pay amounts sufficient to permit the owner of the property to service
the loan. The loans were made on a non-recourse basis to the Lessor but were
secured by the property leased and the owner's rights as Lessor. NCSC
borrowed the funds it lent either under a CFC guarantee or on an interim basis
directly from CFC and purchased from CFC a subordinated certificateSubordinated Certificate in an
amount up to 12% of the amount CFC guaranteed or lent. The subordinated certificatesSubordinated
Certificates generally bear interest at a rate equal to the FFB rate for
34-year loans or 90% of CFC's loan rate and are repaid proportionally as the
amount guaranteed decreases. NCSC is also obligated to pay administrative
and/or guarantee fees to CFC in connection with these transactions. Such fees
are reimbursed to NCSC by the Lessee in each transaction.
Guarantees of Tax IndemnificationsBenefit Transfers
CFC has also guaranteed members' obligations to indemnify against loss of tax
benefits in certain tax benefit transfers.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 REARUS 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 further guarantees of this nature have occurred since 1982 and no
more are anticipated. In connection with these transactions, the members
purchased from CFC an unsecured subordinated certificateSubordinated Certificate in an amount up to 12%
of the amount guaranteed.
Other
CFC may provide other loans and guarantees as requested by its members. Such
loans and guarantees will generally be made on a secured basis with interest
rates and guarantee fees set to cover CFC's cost of capital, general and
administrative expenses, a provision for loan and guarantee losses and
maintenance of a reasonable margin. In connection with these transactions,
the system generally must purchase from CFC an unsecured subordinated certificateSubordinated
Certificate in an amount up to 12% of the amount guaranteed or lent.
CFC FINANCING FACTORSFinancing Factors
Funding for the Company's loan programs are derived from Members' Equity
(net margins, retained as allocated but unreturned patronage capital), from
the sale of its Subordinated Certificates (see Note 3 to Combined Financial
Statements), Collateral Trust Bonds, Medium-Term Notes, Commercial Paper and
Bank Bid Notes. CFC's ability to obtain short-andshort- and long-term funds from
external sources as needed depends on such factors as its reputation in the
investment community, its financial condition and that of its members, the
depth and liquidity of the markets in which it participates, market factors
outside of its control, its ability to conduct its operations to meet or
exceed the financial standards of performance expected by the investment markets
and the credit rating agencies and the continued support of its members.
Each year CFC allocates its net margins (operating margin plus nonoperating
income) among its members in proportion to interest earned by CFC from such
members within various loan pools. These allocations are evidenced by
Patronage Capital Certificates which bear no interest or dividends and havehav
e no stated maturity. These amounts are available for use in CFC's operations
pending their retirement. CFC's current policy is to retire Patronage Capital
Certificates representing 50%70% of the prior year's allocation during the
following year and the remaining 50%30% after 15 years, if permitted by CFC's
contractual obligations and to the extent that the Board of Directors in its
discretion may determine from time to time that the financial 11
14
condition of CFC
will not be impaired as a result. The six years of unretired
allocations that are currently held by CFC will be retired over the next 15
years starting with the retirement to be made in August 1994. RTFC's current policy is to retire 50%70% of
current year's margins within 8 1/28r months of the end of the fiscal year with the
remainder to be retired at the discretion of RTFC's Board of Directors. GFC's
current policy is to retire 100% of current year's margins shortly after the
end of the fiscal year.14
As a condition of membership, CFC members have subscribed to Capital Term
Certificates, which like CFC's other Subordinated Certificates are unsecured
subordinated obligations of CFC. They generally mature 100 years after
issuance and bear interest at the rate of 5% per annum. The purchase of
Subordinated Certificates may also be required as a condition of each long-term
loan and certain intermediate-term loans made by CFC to its members
(Subordinated Certificates issued in connection with loans made prior to June
1, 1983, earn 3% annually, and Subordinated Certificates for loans approved on
or after that date are noninterest-bearing). Subordinated Certificates,
bearing interest at various rates, are also required to be purchased in
connection with CFC guarantees of member debt. The maturity of Subordinated
Certificates purchased in connection with loans and guarantees generally
coincides with the maturity of the related loan or guaranteed debt.
Membership certificates and loan and guarantee certificates represented 52%
and 48%, respectively, of total Subordinated Certificates outstanding at May
31, 1994.1995.
To fund a portion of its long-term fixed rate loan program, CFC issues
intermediate-andintermediate- and long-term senior secured Collateral Trust Bonds and senior
unsecured Medium-Term Notes with differing maturities, interest rates and
redemption provisions. The Collateral Trust Bonds are secured by pledges of
eligible mortgage notes with a principal amount at least equal to the total
amount of bonds outstanding. If certain minimum eligibility ratios are not
maintained, the mortgage notes affected must be replaced with other eligible
collateral. In addition, Commercial Papervariable rate funding supported by an equal amount
of interest rate exchange agreements is used to fund long-term fixed rate
loans (see Note 5 to Combined Financial Statements).
The Company issues Commercial Paper through dealers and directly to members
and other eligible nonmember investors to provide funds for short-,
intermediate-andintermediate- and long-term variable rate loans to members, including REARUS
guaranteed loans, and temporarily to fund long-term fixed rate loans to
members prior to funding with long-term debt. Commercial Paper could also be
used to fund purchases of tax-exempt securities which CFC may be obligated to
purchase pursuant to its commitment to act as standby purchaser. In addition,
CFC may issue Commercial Paper in excess of its own funding needs in order to
provide its members an investment vehicle for their excess funds; CFC uses the
proceeds from such issuances to purchase short-term obligations of other
issuers. Commercial Paper outstanding at May 31, 1995, 1994 1993 and 1992,1993, net of
discount related to the issuance of dealer commercial paper,Commercial Paper, was approximately
$3,892.6 million, $3,429.0 million $2,198.6 million and $2,043.8$2,198.6 million, respectively. The
outstanding commercial paperCommercial Paper at May 31, 1995, 1994 1993 and 19921993 had average
maturities of 68 days, 36 days 46 days and 4446 days, respectively. The amount of
such outstanding Commercial Paper sold directly by CFC to its members and
eligible nonmembers as a percentage of total outstanding Commercial Paper
was 31%29% as of May 31, 19941995 versus 54%31% at May 31, 1993.1994.
CFC also issues short-term Bank Bid Notes to fund its variable rate loans.
These bid notes are unsecured loan obligations. Bid note facilities are
uncommitted lines of credit for which CFC does not pay a fee. The amount of
Bank Bid Notes outstanding as of May 31, 1995, 1994 and 1993 and 1992 was $209.0$350.0
million, $335.0$ 209.0 million and $100.0$ 335.0 million, respectively.
As of May 31, 1994,1995, CFC had two revolving credit agreements totaling $2,900.0$4,050.0
million with 5255 banks, including Morgan Guaranty Trust Company of New York as
Arranger,Administrative Agent and ArrangerCo-Syndication Agent and the Bank of Nova
Scotia as ManagingCo-Syndication Agent. These credit facilities were arranged
principally to provide liquidity support for CFC's outstanding Commercial
Paper and the adjustable or floating/fixed rate bonds which CFC has guaranteed
for the benefit of its members.
Under the respective revolving credit agreements, CFC can borrow up to
$2,030.0$2,430.0 million until June 3, 1996February 28, 2000 (the "three-year"five-year facility"), and an
additional $870.0$1,620.0 million until May 26, 1995February 27, 1996 (the "364-day facility").
Any amounts outstanding will be due on those dates. In connection with the
three-yearfive-year facility, CFC pays a per annum facility/commitment fee of .225.125 of
1%. The per annum facility fee for the 364-day facility is .15.10 of
12
15 1%. If
CFC's short-term ratings decline, these fees may be increased by no more than
.2125.1125 of 1%. Borrowings under both agreements will be at one or more rates
as defined in the agreements, as selected by CFC.
The revolving credit agreements require CFC among other things to maintain
Members' Equity and Members' Subordinated Certificates of at least $1,334.4$1,345.0
million (increased each fiscal year by 90% of net margins not distributed to
members) and an average fixed charge coverage ratio over the six most recent
fiscal quarters of at least 1.025 and prohibit the retirement of patronage
capital unless CFC has achieved a fixed charge coverage ratio of 1.05
15
for the preceding fiscal year. The credit agreements prohibit CFC from
incurring senior debt (including guarantees but excluding indebtedness
incurred to fund REARUS guaranteed loans) in an amount in excess of ten times
the sum of Members' Equity and subordinated debt and restrict, with certain
exceptions, the creation by CFC of liens on its assets and contain certain
other conditions to borrowing. The agreements also prohibit CFC from pledging
collateral in excess of 150% of the principal amount of Collateral Trust Bonds
outstanding. Provided that CFC is in compliance with these financial
covenants (including that CFC has no material contingent or other liability or
material litigation that was not disclosed by or reserved against in its most
recent annual financial statements) and is not in default, CFC may borrow
under the agreements until the termination date. As of May 31, 19941995 CFC was
in compliance with all covenants and conditions.
As of May 31, 19941995 there were no borrowings outstanding under the revolving
credit agreements. On the basis of the three-yearfive-year facility, at May 31, 1994,1995,
CFC classified $2,030.0$2,430.0 million of its notes payable outstanding as long-term
debt. CFC expects to maintain more than $2,030.0$2,430.0 million of notes payable
outstanding during the next 12 months. If necessary, CFC can refinance such
notes payable on a long-term basis by borrowing under the three-yearfive-year facility,
subject to the conditions therein.
In addition to the revolving credit facilities at May 31, 1994, CFC also
had $610.0 million in separately negotiated 364-day lines of credit, documented
by a uniform line of credit agreement for which a commitment fee of .10 of 1% is
paid. The line of credit agreement contains the same financial covenants as the
revolving credit agreements and may be terminated upon 30 days notice by either
party. After such notice, the bank would not be obligated to lend.
Interest rates charged on loans by CFC include the cost of funds incurred by
CFC plus increments estimated to cover general and administrative expenses, a
provision for loan and guarantee losses and to provide margins in amounts
considered by CFC to be consistent with sound financial practice. While
interest rates are set to cover estimated costs and to provide reasonable
margins, CFC does not always match the maturity of its borrowings to those of
its loans. CFC generally finances its long-term loans to members through
borrowings having shorter maturities than the loans; however, CFC generally
finances its fixed rate loans with funds whose maturities coincide with, or
exceed, the rate adjustment cycle of the loan.
13
16
Set forth below is a table showing CFC's outstanding borrowings and the
weighted average interest rates thereon as of the dates shown:
CFC BORROWINGS
AMOUNTS OUTSTANDING AT MAYAmounts Outstanding at May 31,
----------------------------------------------------------------------------------(Dollar Amounts In Thousands) 1995 1994 1993 1992
---------- ---------- ----------
(DOLLAR AMOUNTS IN THOUSANDS)
Long-andLong- and intermediate-term debt:(A)
9 1/4% Series P Bonds, Due
1992(B)........................... $ -- $ -- $ 99,700
10 1/2% Series N Bonds, Due
1995(B)........................... -- -- 100,000
9 3/8% Series Q Bonds, Due 1995(B)........................... -- 149,800 0 0 149,800
9 5/8% Series R Bonds, Due 1996(B)........................... -- 99,600 0 0 99,600
9.85% Series S Bonds, Due 1996(B)... -- 0 0 99,700
99,700
9 1/2%9.5% Series T Bonds, Due 1997.....1997 150,000 150,000 149,800
149,800
8 1/2%8.5% Series U Bonds, Due 1998.....1998 149,800 149,800 149,800
7.40% Series A Bonds, Due 2007......2007 (B) 0 2,819 6,319 8,619
9 3/4% Series F Bonds, Due
2009(B)........................... -- -- 76,769
Floating Rate Series E-2 Bonds,
Due 2010..............................2010 2,189 2,253 2,279 2,315
9% Series O Bonds, Due 2016.........2016 82,289 87,400 91,600 95,800
9% Series V Bonds, Due 2021.........2021 150,000 150,000 149,800
149,800Floating Rate Series 1994A, Due 1996 150,000 0 0
Medium-Term Notes and weighted
average interest rates............rates 573,637 (7.23%) 472,208 (6.99%) 456,538 (7.29%) 537,365 (7.90%)
---------- ---------- ----------
Total long-and intermediate-term
debt and weighted average interest
rates(C)............. 1,014,480(D)rates (C) 1,257,915 (D) (7.90%) 1,014,480 (8.06%) 1,355,236 (8.56%) 1,719,068 (8.90%)
Members' Subordinated Certificates,
including advance payments and
weighted average interest rates(E)..........................rates (E) 1,096,466 (4.36%) 1,086,529 (4.46%) 1,066,755 (4.58%)
1,056,928 (4.17%)
---------- ---------- ----------
Total long-andlong- and intermediate-term
debt and Members' Subordinated
Certificates and weighted average
interest rates........rates $2,354,381 (6.25%) $2,101,009 (6.20%) $2,421,991 (6.81%) $2,775,996 (7.10%)
========= ========= =========
Short-term debt(F) and weighted
average interest rates(G)........... $4,242,570 (6.11%) $3,637,975 (4.23%) $2,533,624 (3.14%) $2,143,815 (3.85%)
========= ========= =========
Total debt and weighted average
interest rates at May 31............ $5,738,984 (4.95%31 $6,596,951 (6.16%) $4,955,615 (4.93%$5,738,984 (4.95%) $4,919,811 (5.68%$4,955,615 (4.93%)
========= ========= =========
- - ---------------
(A) Net of $0.2$1.1 million, $1.5$ 0.2 million and $30.7$ 1.5 million principal amount of
bonds held in Treasurytreasury at May 31, 1995, 1994 and 1993, and 1992, respectively, all
of which $0.2 million, $1.5 million and $1.8 million, respectively, was purchased in connection with CFC's deferred compensation
program.
(B) Series N Collateral Trust Bonds were called July 2, 1992. Series P
Collateral Trust Bonds matured November 1, 1992. Series F Collateral Trust
Bonds were called September 3, 1992, at a premium of 4.07%.The Series Q Collateral Trust Bonds were called on June 16, 1993, at par.
The Series R Collateral Trust Bonds were called on February 2, 1994, at
par. The Series S Collateral Trust Bonds were called on April 18, 1994,
at par. The Series A Collateral Trust Bonds were called on December 1,
1994, at par.
(C) Excludes $2,030.0$2,430.0 million, $2,030.0 million and $1,750.0$ 2,030.0 million of
Commercial Paper classified as long-term debt as of May 31, 1995, 1994
1993 and 1992,1993, respectively (see Note 4 to Combined Financial Statements).
(D) Total long-andlong- and intermediate-term debt includes $200.8$262.7 million which will
be due or is expected to be redeemed during fiscal year 1995.1996.
(E) Excluding $107.1$114.1 million, $116.5$ 107.1 million and $128.0$ 116.5 million of Debt
Service Reserve Certificates, and $29.3$24.3 million, $32.4$ 29.3 million and
$36.2$ 32.4 million of subscribed but unissued Subordinated Certificates as of
May 31, 1995, 1994 1993
and 1992,1993, respectively, since such funds are not
generally available for investing in earning assets.
(F) Net of discount; includes $2,030.0$2,430.0 million, $2,030.0 million and $1,750.0$ 2,030.0
million of Commercial Paper classified as long-term debt as of May 31,
1995, 1994 1993 and 1992,1993, respectively. Includes $209.0$350.0 million, $335.0$ 209.0
million and $100.0$ 335.0 million of Bank Bid Notes at May 31, 1995, 1994 1993 and
1992,1993, respectively (see Note 4 to Combined Financial Statements).
(G) Average interest rates are weighted on the basis of amounts of outstanding
borrowings without adjustment for bank credit compensation arrangements
for short-term borrowings.
14
17
Set forth below are the weighted average costs incurred by CFC on its
short-term borrowings (Commercial Paper and Bank Bid Notes) and on its
long-term borrowings (Collateral Trust Bonds, Medium-Term Notes and interest
rate swaps) for the period shown.
INTEREST COSTS ON CFC BORROWINGS
YEARS ENDED MAYYears ended May 31,
-----------------------1995 1994 1993 1992
----- ----- -----
Short-term borrowings........................................borrowings 5.59% 3.67% 3.61%
5.23%
Long-term borrowings.........................................borrowings 8.15% 8.63% 8.92%
9.40%
Total short-andshort- and long-term borrowings....................borrowings 6.15% 5.14% 5.80% 7.18%
TAX STATUSTax Status
In 1969, CFC obtained a ruling from the Internal Revenue Service ("IRS"(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 Subchapter T corporations.
INVESTMENT POLICYInvestment Policy
Surplus funds are invested pursuant to policies adopted by CFC's Board of
Directors. Under present policy, surplus funds may be invested in direct
obligations of or obligations guaranteed by the United States or agencies
thereof, the World Bank, or certain high quality commercial paper,Commercial Paper,
obligations of foreign governments, Eurodollar deposits, bankers' acceptances,
bank letters of credit, certificates of deposit or working capital acceptances.
The policy also permits investments in certain types of repurchase agreements
with highly rated financial institutions, whereby the assets consist of
eligible securities listed above set aside in a segregated account. CFC
typically has two types of funds available for investment: (1) the debt
service reserve funds held by the collateral trust bond trusteeCollateral Trust Bond Trustee under the
Collateral Trust Bond Indenture between CFC and Manufacturer Hanover Trust CompanyChemical Bank ("1972
Indenture"), used to make bond interest and sinking fund payments; and
(2) member loan payments and commercial
paperCommercial Paper investments in excess of the
daily cash funding requirements. Debt service reserve funds are invested with
maturities scheduled to coincide with interest and sinking fund payment dates.
OTHER SOURCES OF LOANS TOOther Sources of Loans to CFC MEMBERSMembers
In addition to CFC, there are other lending sources which supplement REA
financing, some of whose lending rates may be lower than CFC's.RUS
financing. At May 31, 1994,1995, CFC had 5,443 long-term mortgage loans committed or
outstanding to distribution systems totaling approximately $4,965.5$4,940.0 million,
and to CFC's knowledge other lenders, excluding REA,RUS, had 407 such loans, at May 31,
1994,1995, totaling approximately $475.0$702.2 million. At May 31, 1994,1995, CFC had 118
committed or outstanding long-term mortgage loans for power supply projects
totaling approximately $1,161.5$1,388.1 million, of which $429.1 million was fully
guaranteed by RUS, and to CFC's knowledge other lenders, excluding REARUS and
FFB, had such loans committed or outstanding for power supply projects in a
total amount of approximately $2,750.0$4,570.1 million.
EMPLOYEESEmployees
At May 31, 1994,1995, CFC had 157134 employees, including engineering, financial and
legal personnel, management specialists, loan examiners, accountants and
support staff. CFC believes that its relations with its employees are good.
15
18
THE RURAL ELECTRIC AND TELEPHONE SYSTEMS
GENERALGeneral
CFC's 899903 rural electric Utility Members as of May 31, 1994,1995, were drawn from
the approximately 937930 (at December 31, 1992)1993) rural electric utility systems
(the "systems") which were eligible for REARUS loans. A large proportion of the
eligible systems are members of CFC and information regarding these systems is
available in the Annual Statistical Reports of REA ("REARUS (the "RUS Reports"),
therefore commentary in this section is based on information about the systems
generally, rather than CFC members alone (see Note on page 19)20). However, the
Composite Financial Statements on pages 2021 to 2425 relate only to CFC Utility
Members. At December 31, 19921993 and for the year then ended, CFC's members
accounted for approximately 96%98% of the total utility plant, 91%93% of the total
equity, 92%97% of the net margins and 92%93% of the total number of systems covered
by REARUS Reports, and CFC believes that its members are representative of the
systems as a whole.
Although generally stable retail rates have been the historical pattern for
REARUS borrowers, in the 1970's and early 1980's rising costs of fuel, material,
labor, capital and wholesale power required rate increases by most of the
distribution systems. Increases in costs have also resulted in rate increases
by the power supply systems. Virtually all power contracts between power
supply systems and their member distribution systems provide for rate
increases to cover increased costs of supplying power, although in certain
cases such increases must be approved by regulatory agencies. During the last
five years, costs and rates have generally been stable.
THE REA PROGRAMThe RUS Program
Since the enactment of the Rural Electrification Act in 1936, REARUS has financed
the construction of electric generating plants, transmission facilities and
distribution systems in order to provide electricity to persons in rural areas
who were without central station service. Principally through the
organization of systems under the REARUS loan program in 46 states and U.S.
territories, the percentage of farms and residences in rural areas of the
United States receiving central station electric service increased from 11% in
1934 to almost 99% currently. Rural electric systems serve 11% of all
consumers of electricity in the United States and its territories. They
account for approximately 8% of total sales of electricity and about 6%7% of
energy generation and generating capacity.
In 1949, the Act was amended to allow REARUS to lend for the purpose of furnishing
and improving rural telephone service. At December 31, 1992, 8991993, 883 of REA's 957RUS's 940
telephone borrowersborowers provided service to 6.15.6 million subscribers throughout the
United States and its territories (reporting information was not available for
the remaining 5857 borrowers).
The Rural Electrification Act provides for REARUS to make insured loans and to
provide other forms of financial assistance to borrowers. REARUS is authorized
to make direct loans, at below market rates, to systems which are eligible to
borrow from it. REARUS is also authorized to guarantee loans which have been
used mainly to provide financing for construction of Bulk Power Supply
Projects. Guaranteed loans bear interest at a rate agreed upon by the
borrower and the lender (which generally has been the FFB). For telephone
borrowers, REARUS also provides financing through the Rural Telephone Bank
(RTB)(the "RTB"). The RTB is a government corporation providing financing at rates
reflecting its cost of capital. REARUS exercises a high degree of financial and
technical supervision over borrowers' operations. Its loans and guarantees
are generally secured by a mortgage on substantially all of the system's
property and revenues.
Legislation has been proposed which would provide funding of $675$590 million for
the REARUS insured loan program for electric borrowers for FY 1995 and $498$370
million for the telephone borrowers through REARUS and the RTB. In addition,
funding of $300 million was proposed for the REARUS guaranteed electric loan
program and funding of $120 million was proposed for the RUS guaranteed
telephone loan program.
Legislation has been enacted which allows REARUS electric borrowers to prepay
their loans to REARUS 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 REARUS lending for a period of ten years, except in certain
specified instances. Regulations regarding the note buy-out, relating to
computation of discount and certain issues 16
19
concerning potential taxes on gains,
were adopted on March 22, 1994. As of May 31, 1994, no1995, 34 borrowers have either
fully prepaid or partially prepaid their REA loansRUS notes, under these rules.
DISTRIBUTION SYSTEMSthe provisions
adopted in 1994, in the total amount of $437.3 million.
19
Distribution Systems
Distribution systems are local utilities distributing electric power, generally
purchased from wholesale sources, to consumers in their service areas.
Virtually all are locally-managed cooperative, non-profit associations, and
most have been in operation for at least 40 years. At December 31, 1992,1993, the
approximate number of consumers served by REARUS electric borrowers was 12.212.4
million, representing an estimated 28.832.5 million ultimate users. Aggregate
operating revenues of the distribution systems from sales of electric energy
for the year ended December 31, 1992,1993, totaled $14.0$15.1 billion, of which 65%66% was
derived from the sales of electricity to residential consumers (farm and
nonfarm)non-farm), 31%30% from such sales to commercial and industrial consumers and the
remainder from sales to various other consumers.
The composite TIER of CFC member distribution systems increased to 2.54 in
1993 from 2.19 in 1992 from 2.11 in 1991.1992. The composite DSC ratio fellincreased to 2.44 in 1993
from 2.13 in 1991 to 2.07 in 1992. Composite equity as a percent of total assets for member
distribution systems increased from 38.18% at December 31, 1991 to 39.44% at December 31, 1992.1992 to 40.83% at
December 31, 1993.
The cost of purchased wholesale power in 19921993 amounted to 66.5%65.95% of the total
revenues of the distribution systems. Information from REARUS concerning the
amount of energy generated and purchased by REARUS borrowers including
distribution systems during the 12 months ended December 31, 1992 (19931993 (1994 data
is not available) indicates that 18.4%20.1% was purchased from power companies
including investor-owned utilities and industrial and manufacturing
corporations, 55.5%52.8% from rural electric power supply systems and other
distribution systems having generating facilities, 18.8%19.4% from Federal agencies
and 7.3%7.7% from publicly-owned power suppliers, such as municipal systems.
Wholesale power supply contracts ordinarily guarantee neither an uninterrupted
supply nor a constant cost of power. Contracts with REA-financed
power supplyRUS-financed Power Supply
systems (which generally require the distribution system to purchase all its
power requirements from the power supplyPower Supply system) provide for rate increases to
pass along increases in sellers' costs (subject in certain cases to regulatory
approval). The wholesale power contracts permit the power
supplyPower Supply system,
subject to approval by REARUS 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 supplyPower Supply system and to
provide for the establishment and maintenance of reasonable reserves. The
rates under the wholesale power contracts are required to be reviewed by the
Board of Directors of the power supplyPower Supply system at least annually.
Power contracts with investor-owned utilities or power supplyand Power Supply systems which
do not borrow from REARUS generally have rates subject to regulation by the
Federal Energy Regulatory Commission. Contracts with Federal agencies
generally permit rate changes by the selling agency (subject, in some cases,
to Federal regulatory approval). In the case of many distribution systems,
only one power supplier is within a feasible distance to provide wholesale
electricity.
POWER SUPPLY SYSTEMS
Power supplySupply Systems
Power Supply systems are utilities which purchase andor generate electric power
and provide it wholesale to distribution systems for delivery to the ultimate
retail consumer. Of the 62 operating power supplyPower Supply systems financed in whole
or in part by REARUS or CFC at December 31, 1993,1994, 61 were cooperatives owned
directly or indirectly by groups of distribution systems and one was government
owned. Of this number, 39 had generating capacity of at least 100,000
kilowatts, and eight had no generating capacity. FiveSix of the eight systems
with no generating capacity operated transmission lines to supply certain
distribution systems, one has applied for REARUS financing for its first
transmission facility and two areone is currently building theirits first transmission
facilities. Certain other power supplyPower Supply systems had been formed but did not
yet own generating or 17
20
transmission facilities. At December 31, 1992,1994, the 58 power supply55
Power Supply systems reporting to REARUS owned 145 generating plants with a total
generating capacity of approximately 29,597,000 kilowatts, or approximately
4.3% of the nation's estimated electric generating capacity, and served 700 REA716
20
RUS distribution system borrowers (representing an average for the year of
approximately 8.38.5 million consumers). Certain of the power supplyPower Supply systems
which own generating plants lease these facilities to others and purchase
their power requirements from the lessee-operators.
Of the power supplyPower Supply systems' total generating capacity in place as of December
31, 1992,1994, steam plants accounted for 94.2% (including nuclear capacity
representing approximately 10.2% of such total generating capacity), internal
combustion plants accounted for 5.5% and hydroelectric plants accounted for
0.3%. REARUS loans and loan guarantees as of December 31, 1992,1994, have provided
funds for the installation of over 34,031,000 kilowatts, of which nuclear is
approximately 3,806,000 kilowatts, or 11.2% of the total, of which 979,0001,279,000
kilowatts have officially been cancelled, or 2.9%3.8% of the total.
The high level of growth in demand for electricity experienced in the 1970's
was not expected to decline in the 1980's and the power supplyPower Supply systems
continued their construction programs in anticipation of continued growth in
demand. During the 1980's, however, slower growth in power requirements of
the systems reduced the need for additional generating capacity in most areas
of the country. Thus, many areas are now experiencing a surplus of generating
capacity and, as a result, some power supplyPower Supply systems have significant amounts
of fixed costs for power plant investment not fully supported by increased
revenues (see Note 10 to Combined Financial Statements for further information
concerning certain CFC members experiencing this problem).
While the level of funds needed for new generating units is expected to be low
over the next few years, the need for transmission and capital additions will
continue to generate substantial long-term capital requirements. The power
supplyPower
Supply systems are expected to continue to seek to satisfy these requirements
primarily through the REARUS loan guarantee program.
REGULATION AND COMPETITIONTelephone Systems
As of December 31, 1993, (complete data at December 31, 1994 was not yet
available) there were 883 telephone systems that were RUS borrowers. The 883
telephone systems included 243 cooperative, not-for-profit organizations and
640 commercial, for-profit organizations. These organizations provided
telephone service to approximately 5.6 million consumers and owned
approximately 886,000 miles of telephone lines. Total assets at December 31,
1993 were $13.3 billion, with a composite TIER of 4.15 and composite equity
ratio of 43.6%. The telephone systems operate in all fifty states and seven
U.S. territories.
The RTB was created by a 1971 amendment to the Rural Electrification Act (the
"Act") to serve as a source of supplemental financing for rural telephone
systems. To initially capitalize the RTB, between 1971 and 1991, the
government purchased $592 million in Class A stock of the RTB. RTB borrowers
who are required to purchase class B stock in an amount equal to five percent
of the amount of each loan have, as of June 30, 1995, invested $524 million.
In addition, borrowers and other eligible entities have purchased $112 million
in Class C stock of the RTB.
The Act provides that the RTB is to redeem and retire the government's Class A
stock as soon as practicable after September 30, 1995, but not to the extent
that the bank's board determines that such retirement would impair the
operation of the RTB. The minimum amount of Class A stock to be retired each
year after September 30, 1995 is the amount of the Class B stock that is
issued. Language in the United States Government Fiscal Year 1996 House
Agriculture Appropriations Bill would limit the amount of Class A stock that
can be redeemed in fiscal year 1996 to five percent of the amount of Class A
stock outstanding. The Senate has not yet passed its bill, but is likely to
adopt the House provision or retain the statutory minimum.
Regulation and Competition
The degree of regulation of rural electric systems by state authorities varies
from state to state. The retail rates of rural electric systems are regulated
in 1716 states (in which there are approximately 289248 systems). Distribution systems in these
states account for 34%28% of the total operating revenues and patronage capital
of all distribution systems nationwide. State agencies, principally public
utility commissions, of 2019 states regulate those states' approximately 300276 systems as to the
issuance of long-term debt securities. In sixfive states (in which there are approximately 10051
systems) state agencies regulate, to varying degrees, the issuance of
short-term debt securities. Since 1967, the Federal Power Commission and its
successor, the Federal Energy Regulatory Commission ("FERC"), which regulates
interstate sales of energy at wholesale, have taken the position that it lacks
jurisdiction to regulate cooperative rural electric systems which are current
borrowers from REA.RUS. However, rural electric cooperatives that pay off their
REARUS debt or never incur REARUS debt may be regulated by FERC
21
with respect to financing and/or rates. To date,At present, four power supplyPower Supply systems
and one distribution system are regulated by FERC.
Varying degrees of territorial protection against competing utility systems are
provided to distribution systems in 41 states (in which over 92% of the
distribution systems are located). Changes in administrative or legislative
policy in several states, or Federal legislation, may result in more or in
less territorial protection for the distribution systems.
In addition to competition from other utility systems, some distribution
systems have expressed increasing concern about the loss of desirable suburban
service areas as a result of annexation by expanding municipal or franchised
investor-owned utility systems, regardless of the degree of territorial
protection otherwise provided by applicable law. The systems are also subject
to competition from alternate sources of energy such as bottled gas, natural
gas, fuel oil, diesel generation, wood stoves and self-generation.
The systems, in common with the electric power industry generally, may incur
substantial capital expenditures and increases in operating costs in order to
meet the requirements of both present and future
18
21 Federal, state and local
standards relating to safety and environmental quality control. These include
possible requirements for burying distribution lines and meeting air and water
quality standards.
On November 15, 1990, amendments to the Clean Air Act of 1970 (the
"Amendments"), designed to cause utilities and others to reduce emissions,
became law. The Amendments contain a range of compliance options and a
phase-in period which will help mitigate the immediate costs of implementation.
Many of CFC's member systems already comply with the provisions of the
Amendments. CFC is currently monitoring the overall impact of the Amendments
on individual member systems, which must implement compliance plans and
operating or equipment modifications for Phase I of the Act (1995), and for
those affected in Phase II of the Act (2000). Compliance plans for member
systems with units affected in Phase I primarily involve fuel switching to
low-sulfur coal. The trading of emission allowances may also be an economical
alternative in Phase II. Some member systems originally believed to be
affected by the Amendments have developed strategies designed to minimize the
Amendment's impact. At this time, it is not anticipated that the Amendments
will have a material adverse impact on the quality of CFC's loan portfolio.
FINANCIAL INFORMATIONFERC has released notice of proposed rulemaking (the "MegaNOPR") to solicit
comments on pending policy changes aimed at increasing access to the nation's
electric transmission lines. The proposed changes would require utilities
with power transmission lines to grant access at a set fee to anyone seeking
to use those lines. The avowed purpose of this initiative is to promote
competition in bulk power markets.
The impact of such regulations, if adopted, on the rural electric systems
would depend upon the final rules regarding many issues, including (1) the
pricing of the tariffs filed by FERC regulated public utilities, and the
pancaking (adding of tariffs for systems crossed) effect of wheeling over
several systems; (2) how existing contracts are handled; (3) the definition
and recoverability of "stranded costs" imposed on departing customers;
(4) practical limits placed on access; (5) the owner's obligation to upgrade
its transmission system to accomodate service and RUS interpretation of RE
Act beneficiary use of the cooperative's facilities' ; and (6) reciprocity
requirements (i.e., to offer service as a condition of requesting service),
and affiliated organization issues (would a G&T's obligation extend to its
distribution members).
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". Under the provisions of this Act, FERC has the
authority to order such cooperatives to wheel power for unaffiliated entities.
Under sections 205 and 206 of the Federal Power Act, cooperatives that pay off
their RUS debt are treated as "public utilities". FERC is proceeding under
the legal theory that, under these sections, it can order "public utilities"
to provide open access.
All telephone systems are regulated by the Federal Communications Commission
(the "FCC") with respect to long distance access rates. Most states also
regulate local rates.
Financial Information
The systems differ from investor-owned utilities in that the vast majority
are cooperative, non-profit organizations operating under policies which
provide that rates should be established so as to minimize rates over the
longterm.long-term.
22
Revenues in excess of operating costs and expenses are referred to as "net
margins and patronage capital" and are treated as equity capital furnished by
the systems' consumers. This "capital" is transferred to a balance sheet
account designated as "patronage capital", and is usually allocated to
consumers in proportion to their patronage. Such capital is not refunded to
them for a period of years during which time it is available to the system to
be used for proper corporate purposes. Subject to their applicable contractual
obligations, the systems may refund such capital to their members when doing
so will not impair the systems' financial condition. In the terminology of the
Uniform System of Accounts prescribed by REARUS for its borrowers, "operating
revenues and patronage capital" refers to all utility operating income received
during a given period.
Similar to the practice followed by investor-owned utilities pursuant to FERC
procedures and as prescribed by REA,RUS, the systems capitalize as a cost of
construction the interest charges on borrowed funds ("interest charged to
construction") and the estimated unearned interest attributable to internally-generatedinternally-
generated funds ("allowance for funds used during construction") used in the
construction of generation, and to a lesser extent transmission and
distribution facilities. This accounting policy, which increases net margins
by the amounts of these actual and imputed interest charges, is based on the
premise that the cost of financing construction is an expenditure serving to
increase the productive capacity and value of the utility's assets and thus
should be included in the cost of the assets constructed and recovered over
the life of the assets. In the case of power supplyPower Supply systems, REARUS has included
in its direct loans and guarantees of loans amounts sufficient to meet the
estimated interest charges during construction. If the foregoing accounting
policy were not followed, utilities would presumably request regulatory
permission, if applicable, to increase their rates to cover such costs. The
amounts of interest charged to construction and allowance for funds used
during construction capitalized by distribution systems are relatively
insignificant. Because power
supplyPower Supply systems generally expend substantial
amounts on long-term construction projects, the application of this accounting
policy may result in substantially lower interest expense and in substantially
higher net margins for such systems during construction than would be the case
if such a policy were not followed.
On the following pages are tables providing composite statements of revenues,
expenses and patronage capital of the distribution systems which were members
of CFC and the power supplyPower Supply systems which were members of CFC during the five
years ended December 31, 1992,1993, and their respective composite balance
19
22 sheets
at the end of each such year. TheComplete RUS data for the year ended December
31, 19931994 was not available from REA prior to the filing of this document.
- - ---------------report.
NOTE: Statistical information in the REARUS Reports has not been examined
by CFC's independent public accountants, and the number and geographical
dispersion of the systems have made impractical an independent investigation
by CFC of the statistical information available from REA.RUS. The REARUS Reports are
based upon financial statementsfinancialstatements submitted to REA,RUS, subject to year-end audit
adjustments, by reporting REARUS borrowers and do not, with minor exceptions,
take into account current data for certain systems, primarily those which are
not active REARUS borrowers. As of December 31, 1992, 159 REA1993, 163 RUS borrowers had
repaid their REARUS loans in full and were accordingly not subject to REARUS
reporting requirements.
20
23
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
COMPOSITE STATEMENTS OF REVENUES, EXPENSES AND PATRONAGE CAPITAL
AS REPORTED BY CFC MEMBER DISTRIBUTION SYSTEMS
The following are unaudited figures which are based
upon financial statements submitted to REA
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
COMPOSITE STATEMENTS OF REVENUES, EXPENSES AND PATRONAGE CAPITAL
AS REPORTED BY CFC MEMBER DISTRIBUTION SYSTEMS
The following are unaudited figures which are based
upon financial statements submitted to RUS or to
CFC by CFC Member Distribution Systems
YEARS ENDED DECEMBERYears Ended December 31,
-----------------------------------------------------------------------(Dollar Amounts In Thousands) 1993 1992 1991 1990 1989 1988
----------- ----------- ----------- ----------- -----------
(DOLLAR AMOUNTS IN THOUSANDS)
Operating revenues and patronage capital.........capital $15,072,400 $13,921,515 $13,446,544 $12,819,204 $12,303,951
$11,790,389
----------- ----------- ----------- ----------- -----------
Operating deductions:
Cost of power(1).............................power (1) 9,882,450 9,211,421 8,979,920 8,558,404 8,363,149
8,012,367
Distribution expense (operations)............ 366,148 346,183 327,787 307,649 289,525
271,697
Distribution expense (maintenance)........... 643,390 589,722 558,291 528,746 496,245
463,132
Administrative and general expenses(2).......expenses (2) 1,398,749 1,287,224 1,215,158 1,137,154 1,060,641
974,777
Depreciation and amortization expense........expense 879,957 828,966 775,049 724,951 676,706
630,872
Taxes........................................Taxes 396,024 365,473 337,898 313,403 299,542
278,209
----------- ----------- ----------- ----------- -----------
Total....................................Total 13,566,718 12,628,989 12,194,103 11,570,307 11,185,808
10,631,054
----------- ----------- ----------- ----------- -----------
Utility operating margins........................margins 1,505,682 1,292,526 1,252,441 1,248,897 1,118,143
1,159,335
Non-operating margins............................margins 110,612 157,912 175,993 201,798 202,183
163,528
Power supply capital credits(3)..................credits (3) 274,250 219,638 201,708 163,580 135,394
165,399
----------- ----------- ----------- ----------- -----------
Total....................................Total 1,890,544 1,670,076 1,630,142 1,614,275 1,455,720
1,488,262
----------- ----------- ----------- ----------- -----------
Interest on long-term debt(4)....................debt (4) 730,078 749,594 763,070 741,465 691,738
634,692
Other deductions.................................deductions 36,644 27,841 18,953 22,607 20,396
23,327
----------- ----------- ----------- ----------- -----------
Total....................................Total 766,722 777,435 782,023 764,072 712,134
658,019
----------- ----------- ----------- ----------- -----------
Net margins and patronage capital................capital $1,123,822 $ 892,641 $ 848,119 $ 850,203 $ 743,586
$ 830,243
========== ========== ========== ========== ==========
TIER(5)..........................................TIER (5) 2.54 2.19 2.11 2.15 2.07
2.31
DSC(6)...........................................DSC (6) 2.44 2.07 2.13 2.16 2.09
2.26MDSC (7) 2.21 1.99 2.06 2.05 2.03
Number of systems included.......................included 825 821 819 820 822
823
- - ---------------
(1) Includes cost of purchased power, power production and transmission expense,
separately listed in the applicable REA Report.
(2) Includes sales expenses, consumer accounts and customer service and
informational expense as well as other administrative and general expenses,
separately listed in the applicable REA Report.
(3) Represents net margins of power supply systems and other associated
organizations allocated to their member distribution systems and added in
determining net margins and patronage capital of distribution systems under
REA accounting practices. Cash distributions of this credit have rarely been
made by the power supply systems and such other organizations to their
members.
(4) Interest on long-term debt is net of interest charged to construction, which
is stated separately as a credit in REA(1) Includes cost of purchased power, power production and transmission
expense, separately listed in the applicable RUS Report.
(2) Includes sales expenses, consumer accounts and customer service and
informational expense as well as other administrative and general
expenses, separately listed in the applicable RUS Report.
(3) Represents net margins of Power Supply systems and other associated
organizations allocated to their member distribution systems and added in
determining net margins and patronage capital of distribution systems
under 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 in RUS Reports. For a description
of the reasons for, and the effect on net margins and patronage capital
of, the accounting policies governing interest charged to construction and
allowance for funds used during construction, see "Financial
Information". CFC believes that amounts incurred by distribution systems
for interest charged to construction and allowance for funds used during
construction are immaterial relative to their total interest on long-term
debt and net margins and patronage capital.
(5) Determined by adding interest on long-term debt (in each year including
all interest charged to construction) and net margins and patronage
capital and dividing the total by interest on long-term debt (in each year
including all interest charged to construction).
(6) The ratio of (x) net margins and patronage capital plus interest on
long-term debt (including all interest charged to construction) plus
depreciation and amortization to (y) long-term debt service obligations.
(7) Modified DSC ("MDSC") calculation is the ratio of (x) operating margins
and patronage capital plus interest on long-term debt (including all
interest charged to construction) plus depreciation and amortization
expense plus Non-operating Margins-Interest plus cash received in respect
of generation and transmission and other capital credits to (y) long-term
debt service obligations.
21
24
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
COMPOSITE BALANCE SHEETS
AS REPORTED BY CFC MEMBER DISTRIBUTION SYSTEMS
THE FOLLOWING ARE UNAUDITED FIGURES WHICH ARE BASED
UPON FINANCIAL STATEMENTS SUBMITTED TO REA OR TO
CFC BY CFC MEMBER DISTRIBUTION SYSTEMS
AT DECEMBERThe following are unaudited figures which are based
upon financial statements submitted to RUS or to
CFC by CFC Member Distribution Systems
At December 31,
-----------------------------------------------------------------------(Dollar Amounts In Thousands) 1993 1992 1991 1990 1989 1988
----------- ----------- ----------- ----------- -----------
(DOLLAR AMOUNTS IN THOUSANDS)
Assets and other debits:
Utility plant:
Utility plant in service.................service $29,172,898 $27,502,596 $25,846,550 $24,370,100 $22,754,138
$21,348,335
Construction work in progress............progress 697,329 619,764 615,425 623,356 650,533
565,233
----------- ----------- ----------- ----------- -----------
Total utility plant..................plant 29,870,227 28,122,360 26,461,975 24,993,456 23,404,671 21,913,568
Less: accumulated provision for
depreciation and amortization..........amortization 7,992,325 7,401,028 6,812,221 6,330,979 5,879,089
5,430,210
----------- ----------- ----------- ----------- -----------
Net utility plant....................plant 21,877,902 20,721,332 19,649,754 18,662,477 17,525,582
16,483,358
Investments in associated organizations(1)...organizations (1) 2,847,260 2,585,621 2,405,290 2,255,370 2,123,391
2,005,165
Current and accrued assets...................assets 3,733,893 3,611,874 3,624,025 3,585,399 3,362,784
3,001,563
Other property and investments...............investments 366,452 343,734 323,445 311,937 248,245
225,738
Deferred debits..............................debits 463,194 439,529 342,855 287,294 263,002
194,863
----------- ----------- ----------- ----------- -----------
Total assets and other debits........debits $29,288,701 $27,702,090 $26,345,369 $25,102,477 $23,523,004 $21,910,687
========== ========== ========== ========== ==========
Liabilities and other credits:
Net worth:
Memberships..............................Memberships $ 100,689 $ 98,450 $ 93,207 $ 91,827 $ 88,972
$ 86,143
Patronage capital and other equities(2)............................equities (2) 11,859,273 10,826,559 9,966,135 9,275,621 8,460,725
7,887,028
----------- ----------- ----------- ----------- -----------
Total net worth......................worth 11,959,962 10,925,009 10,059,342 9,367,448 8,549,697
7,973,171
Long-term debt(3)............................debt (3) 14,569,363 14,303,024 13,958,473 13,461,363 12,681,327
11,882,171
Current and accrued liabilities..............liabilities 2,066,601 1,898,868 1,755,336 1,734,385 1,741,832
1,513,420
Deferred credits.............................credits 598,997 555,618 554,149 521,339 534,176
524,314
Miscellaneous operating reserves.............reserves 93,778 19,571 18,069 17,942 15,972
17,611
----------- ----------- ----------- ----------- -----------
Total liabilities and other credits............................credits $29,288,701 $27,702,090 $26,345,369 $25,102,477 $23,523,004
$21,910,687
========== ========== ========== ========== ==========Equity Percentage (4) 40.8% 39.4% 38.2% 37.3% 36.4%
Number of systems included.......................included 825 821 819 820 822 823
- - ---------------
(1) Includes investments in service organizations, power supply capital
credits and investments in CFC.
(2) Includes non-refundable donations or contributions in cash, services or
property from states, municipalities, other government agencies,
individuals and others for construction purposes separately listed in the
applicable REARUS Report.
(3) Principally debt to REARUS and includes $3,536,794,013, $3,435,994,499,
$3,283,689,097, $3,018,608,279$3,607,159, $3,536,794, $3,435,994,
$3,283,689, and $2,714,809,274$3,018,608 for the years 1993, 1992, 1991, 1990 1989 and 1988,1989,
respectively, due to CFC.
22(4) Determined by dividing total net worth by total assets and other debits.
25
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
COMPOSITE STATEMENTS OF REVENUES, EXPENSES AND PATRONAGE CAPITAL
AS REPORTED BY CFC MEMBER POWER SUPPLY SYSTEMS
THE FOLLOWING ARE UNAUDITED FIGURES WHICH ARE BASED
UPON FINANCIAL STATEMENTS SUBMITTED TO REA OR TO
CFC BY CFC MEMBER POWER SUPPLY SYSTEMS
YEARS ENDED DECEMBERThe following are unaudited figures which are based
upon financial statements submitted to RUS or to
CFC by CFC Member Power Supply Systems
Years Ended December 31,
------------------------------------------------------------------(Dollar Amounts In Thousands) 1993 1992 1991 1990 1989 1988
---------- ---------- ---------- ---------- ----------
(DOLLAR AMOUNTS IN THOUSANDS)
Operating revenues and patronage capital.............. $9,111,434 $8,615,165 $8,553,618 $8,589,575 $8,442,827
---------- ---------- ---------- ---------- ----------capital $9,976,560 $ 9,111,434 $ 8,615,165 $ 8,553,618 $ 8,589,575
Operating deductions:
Cost of power(1)..................................power (1) 6,606,419 5,855,131 5,541,332 5,461,628 5,436,747
5,316,628
Transmission expense (operations)................. 14,391 12,959 11,445 9,451 8,109
7,634
Transmission expense (maintenance)................ 11,081 11,300 11,315 10,611 8,425
8,355
Administrative and general expenses(2)............expenses (2) 333,278 390,521 363,646 338,256 312,364
337,499
Depreciation and amortization expenses............expenses 902,810 872,657 819,586 821,943 796,955
756,050
Taxes.............................................Taxes 223,122 233,420 239,588 182,279 233,891
225,205
---------- ---------- ---------- ---------- ----------
Total.....................................Total 8,091,101 7,375,988 6,986,912 6,824,168 6,796,491
6,651,371
---------- ---------- ---------- ---------- ----------
Utility operating margins.............................margins 1,885,459 1,735,446 1,628,253 1,729,450 1,793,084
1,791,456
Non-operating margins.................................margins 328,958 280,810 329,419 328,349 305,067
168,423
Power supply capital credits(3).......................credits (3) 47,838 30,771 28,405 12,452 19,259
16,496
---------- ---------- ---------- ---------- ----------
Total.....................................Total 2,262,255 2,047,027 1,986,077 2,070,251 2,117,410
1,976,375
---------- ---------- ---------- ---------- ----------
Interest on long-term debt(4).........................debt (4) 2,014,794 2,075,939 1,999,107 1,968,531 1,839,641
2,003,265
Other deductions......................................deductions 184,902 137,344 42,862 203,548 330,870
98,600
---------- ---------- ---------- ---------- ----------
Total.....................................Total 2,199,696 2,213,283 2,041,969 2,172,079 2,170,511
2,101,865
---------- ---------- ---------- ---------- ----------
Net margins and patronage capital..................... $ (166,256)62,559 $(166,256) $ (55,892) $ (101,828)$(101,828) $ (53,101)
$ (125,490)
========= ========= ========= ========= =========
TIER(5)...............................................TIER (5) .98 .92 .97 .95 .97
.94
DSC(6)................................................DSC (6) 1.03 1.05 1.06 1.05 1.08
1.06
Number of systems included(7).........................included (7) 50 49 50 49 50 51 54
- - ---------------
(1) Includes cost of purchased power, power production and transmission
expense, separately listed in the applicable REARUS Report.
(2) Includes sales expenses and consumer accounts expense and consumer
service and informational expense as well as other administrative and
general expenses, separately listed in the applicable REARUS Report.
(3) Certain power supplyPower Supply systems purchase wholesale power from other power
supplyPower
Supply systems of which they are members. Power supply capital credits
represent net margins of power supplyPower Supply systems allocated to member power
supplyPower
Supply systems on the books of the selling power supplyPower Supply systems. This
item has been added in determining net margins and patronage capital of
the purchasing power supplyPower Supply systems under REARUS accounting practices. Cash
distributions of this credit have rarely been made by the selling power
supplyPower
Supply systems to their members. This item also includes net margins of
associated organizations allocated to CFC power supplyPower Supply members and added
in determining net margins and patronage capital of the CFC member
systems under REARUS accounting practices.
(4) Interest on long-term debt is net of interest charged to construction.
Allowance for funds used during construction has been included in non-operatingnon-
operating margins. For a description of the reasons for, and the effect
on net margins and patronage capital of, the accounting policies governing
interest charged to construction and allowance for funds used during
construction, see "Financial Information". According to 23
26
unpublished
information furnished by REA,RUS, interest charged to construction and
allowance for funds used during construction for CFC power supply members
in the years 1988-19921989-1993 were as follows:
26
ALLOWANCE FOR
INTEREST CHARGED FUNDS USED
TO CONSTRUCTION DURING CONSTRUCTION TOTAL
---------------- ------------------- -------------------
(DOLLAR AMOUNTS IN THOUSANDS)Allowance for
Interest Charged Funds used
(Dollar Amounts In Thousands) to Construction During Construction Total
1993 $ 49,237 $8,621 $ 57,858
1992 $ 54,093 $ 4,396$4,396 $ 58,489
1991 $ 49,495 $ 5,241$5,241 $ 54,736
1990 $ 55,670 $ 6,615$6,615 $ 62,285
1989 $100,380 $ 6,761 $ 107,141
1988 $169,045 $ 7,714 $ 176,759$6,761 $107,141
(5) Determined by adding interest on long-term debt (in each year including
all interest charged to construction) and net margins and patronage
capital and dividing the total by interest on long-term debt (in each year
including all interest charged to construction). The TIER calculation
includes the operating results of four financially troubled power supplysix systems which currently fail to make
debt service payments or are operating under a Debt Restructure Agreement,
without which the composite TIER would have been 1.14, 1.14,1.20, 1.15, 1.15, 1.08
1.09 and 1.061.10 for the years ended December 31, 1993, 1992, 1991, 1990 1989 and 1988,1989,
respectively.
(6) The ratio of (x) net margins and patronage capital plus interest on
long-term debt (including all interest charged to construction) plus
depreciation and amortization to (y) long-term debt service obligations.obligations
(including all interest charged to construction). The DSC calculation
includes the operating results of four power supplysix systems experiencing financial difficulties.which currently fail to
make debt service payments or are operating under a Debt Restructure
Agreement. Without these systems, the composite DSC would have been
1.23, 1.25,1.21, 1.22, 1.26, 1.21 and 1.231.21 for the years ended December 31, 1993,
1992, 1991, 1990 1989 and 1988,1989, respectively.
(7) TwelveThirteen CFC power supplyPower Supply system members are not required to report to
REARUS since they are not currently borrowers from REA.RUS. These systems are
either in developmental stages or act as coordinating agents for their
members. Their inclusion would not have a material effect on this data.
In addition, REARUS has determined not to include data for Wabash Valley
Power Association ("Wabash") and Colorado-Ute in their composite
statements due to Wabash's ongoing bankruptcy and the liquidation of
Colorado-Ute (see Note 10 to Combined Financial Statements).
24
27
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
COMPOSITE BALANCE SHEETS
AS REPORTED BY CFC MEMBER POWER SUPPLY SYSTEMS
THE FOLLOWING ARE UNAUDITED FIGURES WHICH ARE BASED
UPON FINANCIAL STATEMENTS SUBMITTED TO REA OR TO
CFC BY CFC MEMBER POWER SUPPLY SYSTEMS
AT DECEMBERThe following are unaudited figures which are based
upon financial statements submitted to RUS or to
CFC by CFC Member Power Supply Systems
At December 31,
-----------------------------------------------------------------------(Dollar Amounts In Thousands) 1993 1992 1991 1990 1989 1988
----------- ----------- ----------- ----------- -----------
(DOLLAR AMOUNTS IN THOUSANDS)
Assets and other debits:
Utility plant:
Utility plant in service............service $32,240,926 $31,375,391 $29,433,524 $29,421,761 $29,777,550
$28,397,925
Construction work in progress.......progress 1,469,882 1,324,432 911,262 695,229 891,907
1,661,158
----------- ----------- ----------- ----------- -----------
Total utility plant.............plant 33,710,808 32,699,823 30,344,786 30,116,990 30,669,457 30,059,083
Less: accumulated provision for
depreciation and amortization.....amortization 9,936,528 8,983,913 7,786,074 7,032,102 6,277,677
5,354,466
----------- ----------- ----------- ----------- -----------
Net utility plant...............plant 23,774,280 23,715,910 22,558,712 23,084,888 24,391,780
24,704,617
Investments in associated organizations(1)...................... 992,921 865,162 740,554 654,419 661,338
696,334
Current and accrued assets..............assets 4,284,613 4,076,841 4,239,802 4,094,006 4,399,010
3,971,761
Other property and investments..........investments 1,899,809 1,717,451 1,503,526 1,447,443 1,121,803
934,573
Deferred debits.........................Debits 4,078,879 1,879,607 1,445,868 2,236,808 2,303,752
2,426,167
----------- ----------- ----------- ----------- -----------
Total assets and other debits...debits $35,030,502 $32,254,971 $30,488,462 $31,517,564 $32,877,683 $32,733,452
=========== =========== =========== =========== ===========
Liabilities and other credits:
Net worth:
Memberships.........................Memberships $ 252 $ 246 $ 244 $ 250 $ 248
$ 258
Patronage capital and other equities..........................equities 432,095 315,793 593,505 544,872 690,481
1,241,015
----------- ----------- ----------- ----------- -----------
Total net worth.................worth 432,347 316,039 593,749 545,122 690,729
1,241,273
Long-term debt(2).......................debt (2) 28,528,640 28,838,255 27,060,357 27,989,365 25,671,597
27,845,960
Current and accrued liabilities.........liabilities 1,185,182 1,531,722 1,391,762 1,492,713 5,117,204
2,280,021
Deferred credits........................credits 1,849,906 1,071,393 1,344,641 1,113,545 1,035,989
1,054,642
Miscellaneous operating reserves........reserves 3,034,427 497,562 97,953 376,819 362,164
311,556
----------- ----------- ----------- ----------- -----------
Total liabilities and other credits.......................credits $35,030,502 $32,254,971 $30,488,462 $31,517,564 $32,877,683
$32,733,452
=========== =========== =========== =========== ===========
Number of systems included(3)...............included (3) 50 49 50 49 50 51 54
- - ---------------
(1) Includes investments in service organizations, power supply capital
credits and investments in CFC.
(2) Principally debt to REARUS or debt guaranteed by REARUS and loaned by FFB.
(3) Twelve CFC power supplyPower Supply system members are not required to report to
REARUS since they are not currently borrowers from REA.RUS. These systems are
either in developmental stages or act as coordinating agents for their
members. Their inclusion would not have a material effect on these data.
ITEMItem 2. PROPERTIES.Properties.
CFC owns and operates a headquarters facility in Fairfax County, in the
Commonwealth of Virginia.
This facility consists of a six-story office building with separate parking
garage situated on four acres of land. The company also owns an additional
eight acres of unimproved land adjacent to the building. On
April 11, 1994, CFC purchased an additional 23 1/231.5 acres of unimproved land adjacent to the building. There are no plans at
this time for future use of either parcel of land.
ITEMItem 3. LEGAL PROCEEDINGS.Legal Proceedings.
None.
25Item 4. Submission of Matters to a Vote of Security Holders.
None.
28
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
PART II
ITEMItem 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.Market for Registrant's Common Equity and Related Stockholder Matters.
Inapplicable.
ITEMItem 6. SELECTED FINANCIAL DATA.Selected Financial Data.
The following is a summary of selected financial data for each of the five
years ended May 31, 1994.1995.
(Dollar Amounts In Thousands) 1995 1994 1993 1992 1991 1990
---------- ---------- ---------- ---------- ----------
(DOLLAR AMOUNTS IN THOUSANDS)
For the year ended May 31:
Operating income...................income $ 440,109 $ 324,682 $ 336,387 $402,255 $428,974
Operating margin $ 402,255 $ 428,974 $ 423,989
========= ========= ========= ========= =========
Operating margin...................41,803 $ 29,159 $ 38,352 $ 42,809 $ 28,564
$ 36,542
Nonoperating income................income 3,409 4,029 3,296 2,744 3,883
2,731
Gain on sale of building........... -- -- --building 0 0 0 0 15,858
--
Extraordinary loss(A).............. --loss (A) 0 0 (3,161) (1,398) (2,800)
--
---------- ---------- ---------- ---------- ----------
Net margins........................margins $ 45,212 $ 33,188 $ 38,487 $ 44,155 $ 45,505
$ 39,273
========= ========= ========= ========= =========
Fixed charge coverage ratio(A).....ratio (A) 1.13 1.13 1.16 1.14 1.14
1.11
========= ========= ========= ========= =========
As of May 31:
Assets.............................Assets $7,080,789 $6,224,296 $5,464,144 $5,401,473 $5,139,624
$4,963,966
========= ========= ========= ========= =========
Long-term debt(B)(C)...............debt (B) $3,423,031 $2,841,220 $3,095,488 $2,971,074 $3,204,357
$3,113,006
========= ========= ========= ========= =========
Members' subordinated certificates.....................certificates $1,234,715 $1,222,858 $1,215,547 $1,221,095 $1,181,010
$1,189,993
========= ========= ========= ========= =========
Members' equity....................equity $ 270,221 $ 260,968 $ 258,299 $ 246,320 $ 243,491
$ 227,201
========= ========= ========= ========= =========
Leverage ratio(D)..................ratio (C) 5.13 4.63 4.41 4.44 4.43 4.29
========= ========= ========= ========= =========
- - ---------------
(A) During the years ended May 31, 1993, 1992 and 1991 CFC paid premiums
totaling $3.2 million, $1.4 million, and $2.8 million respectively, in
connection with the prepayment of Collateral Trust Bonds. Margins used
to compute the fixed charge coverage ratio represent net margins before
extraordinary loss plus fixed charges. The fixed charges used in the
computation of the fixed charge coverage ratio consist of interest and
amortization of bond discount and bond issuance expenses.
(B) Includes commercial paper reclassified as long-term debt and excludes
portion of long-term debt due within one year (see Note 5 to Combined
Financial Statements).
(C) Excludes$262.7 million, $200.8 million, $286.8 million, $494.5 million $109.6 million and $65.1$109.6
million in long-term debt that comes due, matures and/or will be redeemed
early during fiscal years 1996, 1995, 1994, 1993 and 1992, and 1991,
respectively.
(D)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 debt
used to fund loans guaranteed by the U.S. Government, by the total of
Members' Subordinated Certificates and Members' Equity.
CFC has had outstanding guarantees for its members' indebtedness in each of
the fiscal years shown above. Members' interest expense on such indebtedness
was approximately $124.3$128.3 million for the year ended May 31, 1994.1995.
The Company does not have outstanding any common stock and does not pay
dividends. Under current policies, CFC retires Patronage Capital Certificates,
which represent annual allocations of CFC's net margins, 50% of an allocation70% during the next
fiscal year and expects to retire the remaining 50%30% after 15 years with due
regard for CFC's financial condition.
26
29
ITEMItem 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
OVERVIEWManagement's Discussion and Analysis of Financial Condition and
Results of Operations.
Overview
The following discussion and analysis is designed to provide a better
understanding of the Company's combined financial condition and results of
operations and as such should be read in conjunction with the Combined
Financial Statements, including the notes thereto.
CFC was formed in 1969 by rural electric cooperatives to provide them with a
source of funds to supplement the financing provided by REA.RUS. The Company was
organized as a cooperative wherein which each member receives one vote. Under CFC's
bylaws, the Board of Directors must be comprised of 22 individuals who are
either general managers or directors of the members. CFC was granted tax-exempt
status under Section 501(c)(4) of the Internal Revenue Code.
In 1987, RTFC was formed by CFC to provide a source of funds for the rural
telephone industry. Like CFC, RTFC is a cooperative. However, RTFC's bylaws
and voting members' agreement require that the majority of RTFC's Board of
Directors be elected from individuals designated by CFC. The remaining board
positions are filled by individuals nominated by the other RTFC members.
Because CFC has control of the RTFC Board, RTFC's financial condition and
results of operations are combined with those of CFC. CFC is the sole source of funding for RTFC. (Unless stated otherwise,
all references to CFC refer to the combined results of CFC, RTFC and all
other CFC controlled affiliates.)
The principal concept of CFC is to provide a mechanism through which the rural
electric cooperatives can achieve better access to the debt markets. Each
rural electric cooperative which joins CFC agrees to purchase subordinated
subscription certificates from CFC as described below.
CFC's operations consist of providing loans, financial guarantees and other
financial services to its rural electric, telephone and other related
organizations. In connection with any long-term loan or guarantee made by CFC
to or on behalf of one of its members, CFC generally requires that the member
make an additional investment in CFC by purchasing loan or guarantee
certificates. Like the original subscription certificates, the loan and
guarantee certificates are unsecured and subordinate to other debt.
The subscription and loan and guarantee certificates (together, "Subordinated
Certificates") along with related patronage capital provide CFC's base
capitalization. On a regular basis, CFC obtains debt financing in the market
by issuing long-term fixed rate or variable rate Collateral Trust Bonds,
intermediate-term fixed or variable rate Medium-Term Notes, Commercial Paper
and Bank Bid Notes. In addition, CFC obtains debt financing from its
membership and other qualified investors through the direct sale of its
Commercial Paper and Medium-Term Notes.
CFC's primary objective as a cooperative is to provide its members with the
lowest possible loan and guarantee rates. Therefore, CFC marks up its funding
costs only to the extent necessary to cover its operating expenses and a
provision for loan and guarantee losses and to provide for margins sufficient
to preserve interest coverage in light of CFC's financing objectives. To the
extent members contribute to CFC's base capital with Subordinated Certificates
carrying below-market interest rates, CFC can offer proportionally lower
interest rates on its loans to members.
CFC is required by the cooperative laws under which it is incorporated to
allocate its earnings to its members in proportion to the members'
contributions to those earnings. CFC thus allocates its net margins based on
each member's participation in loan programs during the year.
CFC's strengthperformance is closely tied to the performance of its member rural
electric and telephone utility systems due to the near 100% concentration of
its loan and guarantee portfolio in those industries. The following provides
an analysis of both CFC's performance and a discussion of the quality of CFC's
loan and guarantee portfolio.
27
30
FINANCIAL CONDITIONFinancial Condition
At May 31, 1994,1995, CFC had $6.2$7.1 billion in total assets. Approximately $5.9$6.7
billion or 95% of these assets consisted of loans made to CFC's members. The
remaining $0.3$0.4 billion consisted of other assets to support CFC's operations.
Except as required for the debt service account and unless excess cash is
invested overnight, generally CFC does not use funds to invest in debt or
equity securities.
At May 31, 1994, 84%1995, 85% of CFC's loan portfolio consisted of 35-year long-term
secured amortizing loans.loans, including long-term loans classified as nonperforming
and restructured. The remaining 16%15% consisted of short-andshort- and intermediate-term
secured and unsecured lines of credit and long-term loans guaranteed by the
United States Government. Approximately 34.5%32% or $2.1$2.3 billion in long-term loans
carry a fixed rate of interest. All other loans, including $3.0$3.6 billion in
long-term loans, are subject to interest rate adjustment monthly or
semimonthly.
In addition to its loans, CFC had provided approximately $2.7$2.6 billion in
guarantees for its members at May 31, 1994.1995. These guarantees relate primarily
to tax-exempt financed pollution control equipment and to leveraged lease
transactions for equipment and plant.
At May 31, 1994,1995, CFC had also committed to lend an additional amount of
approximately $5.2$5.0 billion to its members. Most unadvanced loan commitments
contain a material adverse change clause. As many of these commitments are
provided for operational backupback-up liquidity, CFC does not anticipate funding
the majority of the commitments outstanding.
CFC funds its assets through the sale of Subordinated Certificates, retained
equity and other debt instruments. As discussed previously, Subordinated
Certificates include both original membership subscription certificates and
loan and guarantee certificates, all of which are subordinate to other CFC
debt. At May 31, 1994,1995, subscription certificates totaled $640$637 million. These
certificates generally mature in 70 to 100 years and generally pay interest at
5.0%. At May 31, 1994,1995, loan certificates totaled $311$326 million and carried a
weighted average interest rate of 1.2%1.1%. At May 31, 1994,1995, guarantee
certificates totaled $271$272 million and carried a weighted average interest rate
of 5.1%4.7%. Both the loan certificates and guarantee certificates are long-term
instruments which generally amortize at a rate equivalent to that of the loan
or guarantee to which they relate. On a combined basis, Subordinated
Certificates carried a weighted average interest rate of 4.5%4.4%. The issuance
of zero percent loan certificates is expected to exceed the issuance of 5.0%
subscription certificates. Therefore, management expects this average
interest rate to decline over time.
CFC's net margins are allocated each year to CFC's member borrowers. Prior to
fiscal year 1994, CFC's policy was to retire net margins on a first-in,
first-out seven year cycle. For fiscal yearsFiscal year 1994 and beyond, net margins will
bewere retired 50% in
the next fiscal year, andwith the remaining 50% to be held for 15 years. During
fiscal year 1995, CFC adjusted its retirement policy to return 70% of net
margins in the next fiscal year and hold the remaining 30% for 15 years.
During the next 1514 years, CFC will retire the existing six years of unretired
allocations representing net margins for fiscal years 1988 to 1993. The
unretired allocations (members' equity) do not earn interest and are junior to
all debt instruments, including Subordinated Certificates. At May 31, 1994,1995,
CFC had $261$270 million in retained equity. Subordinated Certificates, in
conjunction with retained members' equity, supply CFC's base capitalization.
CFC enters the capital markets through the issuance of Collateral Trust Bonds,
Medium-Term Notes, Commercial Paper and Bank Bid Notes. At May 31, 1994,1995, CFC
had $540$532 million in fixed rate long-term Collateral Trust Bonds and $150
million in variable rate Collateral Trust Bonds outstanding. Under its
Collateral Trust Bond Indentures, CFC must pledge as collateral mortgage
notes from its borrowers evidencing loans equal in principal amount to at
least 100% of the outstanding Bonds. At May 31, 1994,1995, CFC had pledged $718$790
million in mortgage notes. During thefiscal year 1994, CFC effected the early
redemption of $350 million in Collateral Trust Bonds, at par. In February
1994, CFC had entered into a new Collateral Trust Bond Indenture, with First
Bank National Association as trustee ("1994 Indenture"), under which future
series of Collateral Trust Bonds will be issued. Virtually all Collateral
Trust Bonds were offered to outside investors in underwritten public offerings.
31
At May 31, 1994,1995, CFC had $472$574 million outstanding in Medium-Term Notes.
Medium-Term Notes are issued for terms of 270 days to 30 years and are
unsecured obligations of CFC. Medium-Term Notes outstanding to CFC's members
totaled $234$367 million at May 31, 1994.1995. The remaining $238$207 million were sold to
outside investors.
28
31
At May 31, 1994,1995, CFC had $3,429$3,893 million outstanding in Commercial Paper with a
weighted average maturity of 3665 days. Commercial Paper notes are issued with
maturities up to 270 days and are unsecured obligations of CFC. Commercial
Paper outstanding to CFC's members totaled $1,061$1,110 million at May 31, 1994.1995.
The remaining $2,368$2,783 million was sold to outside investors.
In addition, CFC obtains funds from various banking institutions under Bank Bid
Note arrangements, similar to bank lines of credit. The notes are issued for
terms up to three months and are unsecured obligations of CFC. At May 31,
1994,1995, CFC had $209$350 million outstanding in Bank Bid Notes.
During the year, total assets increased $760by $856 million. CFC continued to see
an increase in netNet loan balances
outstanding, with an increase of $809increased by $826 million or 15.8%14%. Gross loans increased by a total of $824$843
million, partially offset by an increase in the allowance for loan and
guarantee losses of $16$17 million, over the prior year. As a percentage of the
portfolio, long-term loans (excluding loans guaranteed by REA)RUS) represented 85%
at May 31, 1995, compared to 84% at May 31, 1994, compared to 89% at May
31, 1993. The drop in percentage is due to the increase of $236 million in loans
guaranteed by REA.1994. Long-term fixed rate loans
represented 41%38% and 44%41% of the total long-term loans at May 31, 19941995 and 1993.1994.
Loans converting from the fixed rate to the variable rate or selecting a
variable rate upon the expiration of the current fixed interest rate period
totaled $257$117 million for the year ended May 31, 1994, approximately one-third1995, less than one half of
the $837$257 million of such conversions or
repricingsloans that underwent conversion and repricing for the
year ended May 31, 1993.1994. The loans moving from the fixed rate to a variable
rate were partially offset by $222$75 million and $371$222 million of variable rate
loans that converted to a fixed rate for the years ended May 31, 1995 and
1994, and 1993.respectively. This resulted in a net change of $35$42 million and $466$35
million from the fixed rate to the variable rate for the years ended May 31,
19941995 and 1993,1994, respectively.
The increase in total loans outstanding at May 31, 19941995, was primarily due to
an increase of $400$634 million in long-term variable rate loans, an increase of
$236 million in loans guaranteed by REA and an increase in intermediate-and
short-term loans of $221 million offset by a decrease of $15$132 million in long-term fixed rate loans and an increase of $188 million in
short-term loans, partially offset by a decrease of $18$104 million in nonperformingRUS
guaranteed loans and restructureda decrease of $8 million in intermediate-term loans. The
increase in long-term variable rate loans was primarily
due to an increase of $211$429
million in loans outstanding primarily to telecommunicationelectric systems for the
acquisition of telecommunication propertiesRUS note
buyouts, and to an increase of $197$205 million to distributionstelecommunication systems
primarily for concurrent loan advances.the acquisition of local exchange telecommunication properties.
The increase in REA
guaranteedlong-term fixed rate loans was the result of three new refinancings of FFB debt. The
increase in intermediate-term loans was primarily due to an increase of $77$110
million in loans outstanding primarily to power supplyelectric systems for the financingRUS note
buyouts, and to an increase of the premium charged$22 million in connection with the prepayment of their FFB loans.loans outstanding to
telecommunication systems. The increase in short-term loans was primarily due to an increasethe
renewal of $124 millionlines of credit extended to distribution systems
for interim construction financing.
The increase in net loans outstanding was partially offset by decreases to
cash on hand of $33 million and debt service investments of $12 million. CFC's
cash management policy is to minimize cash on hand to the extent possible.electric systems. The decrease in debt service investmentsRUS
guaranteed loans was due to CFC's resale of its interest in two of the redemptions of three
Collateral Trust Bond series during the
year, reducing the required debt service
payments under the 1972 bond indenture. This amount will continuetrusts and to decrease as
the remaining series are redeemed or mature and no future issues are planned
under the 1972 indenture. The 1994 Indenture, under which CFC plans to issue
future Collateral Trust Bonds, does not require the maintenance of a debt
service reserve fund. The decrease in other assets was primarily due to
refinancings of tax-exempt bonds guaranteed by CFC during the year. CFC did not
require a debt service reserve certificate to be purchased in connection with
the new guarantees.regular principal repayments.
During the year, CFC substantially increased its short-term debt outstanding
to fund both the increase in variable rate loans outstanding and the
early redemption of long-term debt.outstanding. Notes Payable, which
consists of Commercial Paper and Bank Bid Notes, increased $1,104$605 million. This
increase was a result of CFC match-funding as to rate the additional variable
rate loans originated and converted during the year. At May 31, 1994,1995, CFC's short-term debt
consisted of $2,368$2,783 million in dealer Commercial Paper, $1,000$1,050 million in
Commercial paperPaper issued to CFC's members, $61$60 million in Commercial Paper
issued to certain nonmembers and $209$350 million in Bank Bid Notes. The
Commercial Paper outstandingsold to CFC's members and certain nonmembers decreasedincreased by
$116$48 million, and the amount of Bank Bid Notes outstanding decreasedincreased by $126$141
million from the prior year.and Commercial Paper sold through CFC's dealers increased by $1,347$415
million to fundfrom the increase in loans outstanding, the decrease in long-term debt and the decreases
in the other types of short-term debt.
29
32prior year. CFC's short-term debt hashad a weighted average
maturity of 65 days at May 31, 1995, an increase from 36 days at May 31,
1994, a decrease from 46 days at May 31, 1993.1994. Long-term debt consists in part of Collateral Trust Bonds and Medium-TermMedium-
Term Notes. As a result of the decrease in
fixed rate loans, CFC retired three Collateral Trust Bond series, resulting in a
net decrease in long-term debt of $340 million. As described in the footnotes to the combined financial statements,Combined Financial
Statements, CFC reclassifies a portion of its short-term debt as long-term, as
it has the ability (subject to certain conditions) to refinance this short-termshort-
term debt on a long-term basis under its revolving credit agreements. CFC
renegotiated its revolving credit agreements during the fourth quarter of
fiscal year 19931995 and was able to reclassify $2,430 million and $2,030 million
in short-term debt as long-term at May 31, 1995 and 1994, and 1993. On May 27,respectively.
32
During fiscal year 1995, long-term debt outstanding increased by $244 million.
In September 1994, CFC extendedissued $150 million in Series 1994A variable rate
Collateral Trust Bonds due September 1996. The issuance of the 364-day agreement which will now mature on1994A bonds
less required sinking fund payments resulted in an increase of $142 million in
Collateral Trust Bonds outstanding at May 26,31, 1995, compared to the prior year.
Medium-Term Notes outstanding increased by $102 million over the prior year.
Deferred income decreased by $16 million, due to the recognition of conversion
fees into income during fiscal year 1995. CFC also
obtained an additional $610will amortize the remaining $19
million in separately negotiated 364-day lines of credit.
In addition to the $764 million net increase in debt outstanding, CFC also
recorded a decrease in deferred income of $3 million. CFC collects a fee for any
fixed to variable rate conversions allowed. Financial accounting standards
require that this fee income be deferred and takenfees into income as interest on
loans over the original remaining original fixed-rate maturity period of the
converted loan. Duenext two years.
Subordinated Certificates and members' equity increased by $21 million to
the smaller volume of conversions experienced during the
year, deferred conversion fee income decreased from $38$1,505 million at May 31, 19931995, compared to $35$1,484 million at May 31, 1994.
Due to recent policy changes, significant increases in Subordinated
Certificates and members' equity are not anticipated. During fiscal year 1995,
CFC adopted policy changes that reduce the amount of Subordinated Certificates
required to be purchased as a precondition to receiving a loan advance and
increased the amount of allocated net margins to be retired in the next
fiscal year from 50% to 70%.
Off-balance sheet, CFC experienced an increasea decrease of $881$150 million in loan
commitments. This increasedecrease was primarily due to a $410the advance of funds during fiscal
year 1995 for telecommunication acquisitions. Guarantees outstanding
decreased by $81 million increase in
short-term lines of credit anddue to an increase of $318 million in long-term
commitments to Power Supply borrowers and $287 million in long-term commitments
to telecommunication borrowers partially offset by a decrease of $104 million in
intermediate-term loan commitments.scheduled principal repayments.
CFC's leverage ratio increased during the year from 4.41 at May 31, 1993,
to 4.63 at May 31, 1994.1994, to
5.13 at May 31, 1995. The ratio is calculated after excluding all debt
associated with the funding of the REARUS guaranteed loans. Subordinated
Certificates are treated as equity in the calculation of the leverage ratio.
This increase was primarily due to an increase in loans outstanding to members
financed by the issuance of short-term debt, Collateral Trust Bonds and
medium-term notes.Medium-Term Notes. There were no other significant changes in CFC's financial
condition. CFC contemplates that its leverage ratio will continue to increase
as it borrows more to facilitateaccommodate its members' financing requirements. CFC
believes the leverage ratio will be maintained within a range comparable to
that of finance companies which have received comparable ratings from major
rating agencies.
MARGIN ANALYSISMargin Analysis
Fiscal Year 19941995 versus 19931994 Results
CFC uses an interest coverage ratio, instead of the dollar amount of gross or
net margins, as a primary performance indicator, since CFC's net margins are
subject to fluctuations as interest rates change. During the year ended
May 31, 1994,1995, CFC achieved a Times Interest Earned Ratio ("TIER") of 1.13.
This was a
decrease fromequal to the prior fiscal year when ayear's TIER of 1.16 (calculated before
extraordinary loss) was earned.1.13 . Management has
established a 1.10 TIER as its minimum operating objective.
For the year ended May 31, 1994,1995, operating income totaled $324.7$440 million, a
decreasean
increase of $11.7$115 million fromover the prior year. Operating income includes
interest earned on loans and conversion fees. The decreaseincrease in operating
income was due to the general declineincrease in interest rates and CFC's passing on the
resulting savings on to its members. The decrease was due torates. This increase
reflected a negativepositive rate variance of $37.0$74 million which was partially offset byand a positive volume
variance of $25.3$41 million.
For the year ended May 31, 1994,1995, cost of funds totaled $263.2$361 million, a
decreasean
increase of $2.2$98 million from the prior year. Included in cost of funds is
interest expense on CFC's Subordinated Certificates and other debt
instruments offset by interest earnings on debt service investments. The
decreaseincrease in cost of funds was due to the effects of increases in general
market interest rates on CFC's variable rate debt instruments. This increase
reflected a negativepositive rate variance of $8.4$67 million partially offset byand a positive volume
variance of $6.2$31 million.
For the year ended May 31, 1994,1995, gross margins totaled $61.5$79 million. This
represented a decreasean increase from the prior fiscal year of $9.5 million or a reduction
of 0.30% of average loans outstanding.$17 million. This
decreaseincrease was primarily a result of the general reductionincrease in interest rates dueand
to a lower interest rate environment.
30
33the increase in loans outstanding.
General and administrative expenses decreased 5.4% duringincreased by $3 million over the prior
year. This increase is a result of one-time expenses associated with the
changeover from a mainframe computer environment to a client server computer
environment, accelerated write-off of deferred expenses and a major office
renovation. During fiscal year as compared1995, CFC also added $17 million to its loan
and guarantee loss allowance, an increase of 0.2% incurred in$2 million over the prior year.
In addition, CFC
added $15.6Total expenses were $37 million, to its allowance for loan and guarantee losses, an increase of $0.6$5 million fromover the previousprior year.33
Nonoperating income includes guarantee fee income and any other gains and
losses. Nonoperating income increased $0.7decreased by $1 million, from $3.3$4 million for the
year ended May 31, 19931994 to $4.0$3 million for the year ended May 31, 1994.
During the year ended May 31, 1994, CFC retired three Collateral Trust Bond
series totaling $350.0 million, all at par.1995.
Overall, CFC's net margins decreased $5.3increased $12 million from $38.5$33 million for the year
ended May 31, 19931994 to $33.2$45 million for the year ended May 31, 1994.1995. As
described earlier, this decreaseincrease was a result of a decliningan increasing interest rate
environment partially offset by the reduction in operating expenses and thean increase in nonoperating income.loans outstanding. CFC's achieved TIER of 1.13
represents a
decreaseno change from the prior year's achieved TIER of 1.16. The decrease in achieved
TIER was a result of a larger decrease to net margins than to the cost of funds
which resulted from CFC's intentional reduction of the interest rate spread over
cost charged on its loans.TIER.
Fiscal Year 19931994 versus 19921993 Results
For the year ended May 31, 1993,1994, operating income totaled $336.4$325 million, a
decrease of $65.9$12 million from the year ended May 31, 1992.1993. The decrease was
due to a negative rate variance of $67.1$37 million partially offset by a positive
volume variance of $1.2$25 million.
For the year ended May 31, 1993,1994, cost of funds totaled $265.4$263 million, a
decrease of $49.5$2 million from the prior year. The decrease was due to a
negative rate variance of $50.5$8 million partially offset by a positive volume
variance of $1.0$6 million.
For the year ended May 31, 1993,1994, gross margins totaled $71.0$61 million. This
represented a decrease from the prior year of $16.4 million or a decrease of
0.33% of average loans outstanding.$10 million. This decrease was
a result of the lower interest rate environment. The margins necessary to
meet a desired interest coverage ratio are lower in a declining interest rate
environment.
During the year ended May 31, 1993,1994, general and administrative expenses
increaseddecreased by approximately 0.2%.$1.0. In addition, CFC added $15 million to its allowance for
loan and guarantee losses during the year, a decrease of $12
million fromapproximately the same amount as
the prior year.
During the year ended May 31, 1993,1994, CFC retired three Collateral Trust Bond
series. One such series required a prepayment premium of $3.2totaling $350 million, recorded
as an extraordinary loss. During the year ended May 31, 1993, CFC realized
interest savings on the retirement sufficient to cover the prepayment premium.all at par.
Overall, CFC's net margins decreased $5.7$5 million from $44.2$38 million for the year
ended May 31, 19921993 to $38.5$33 million for the year ended May 31, 1993.1994. Again,
this decrease was a result of a declining interest rate environment
offset somewhat by the reduction in the provision for loan and guarantee losses.
Although net margins decreased,environment. CFC
achieved a TIER of 1.13, a decrease from the TIER of 1.16 an increase overachieved the prior
year's TIER of 1.14.year.
The following is a summary of CFC's operating results as a percentage of
average loans outstanding for the last three fiscal years.years ending May 31,
34
INCOME STATEMENT AS A
PERCENTAGE OF AVERAGE LOANS OUTSTANDING1995, 1994 and 1993.
1995 1994 1993 1992
----- ----- -----
Interest on loans....................................................loans 6.72% 5.66% 6.54% 7.86%
Less: Cost of funds..................................................funds 5.51% 4.58% 5.16%
6.15%
----- ----- -----
Gross operating margin..........................................margin 1.21% 1.08% 1.38% 1.71%
----- ----- -----
General and administrative expenses..................................expenses 0.30% 0.29% 0.34% 0.34%
Provision for loan and guarantee losses..............................losses 0.26% 0.27% 0.29%
0.53%
----- ----- -----
Total expenses..................................................expenses 0.56% 0.56% 0.63%
0.87%
----- ----- -----
Operating margin................................................margin 0.65% 0.52% 0.75%
0.84%
----- ----- -----
Nonoperating income(1)...............................................income (1) 0.05% 0.07% 0.00%
0.03%
----- ----- -----
Net margins.....................................................margins 0.70% 0.59% 0.75%
0.87%
===== ===== =====
TIER............................................................TIER 1.13 1.13 1.16 1.14
===== ===== =====
- - ---------------
(1) Nonoperating income includes the extraordinary losses in FYfiscal year 1993 and 1992
resulting from the prepayment of debt.
LOAN AND GUARANTEE PORTFOLIO ASSESSMENT34
Loan and Guarantee Portfolio Assessment
Portfolio Diversity
CFC and its combined affiliates make loans and provide financial guarantees to
their qualified members. The combined memberships include rural electric
distribution systems, rural electric generation and transmission systems,
telecommunication systems, statewide rural electric and telecommunication
associations, and associate organizations.
The following chart summarizes loans and guarantees outstanding by member
class at May 31, 1995, 1994 1993 and 1992.
LOANS AND GUARANTEES OUTSTANDING BY MEMBER CLASS1993.
PERCENTAGE OF TOTAL
-----------------------------Percentage of Total
1995 1994 1993 1992
------- ------- -------
Distribution systems...........................................Systems 49.08% 45.52% 46.56%
45.79%
Power supply systems...........................................Supply Systems 38.87% 44.34% 44.87%
46.53%
Service organizations..........................................Organizations 1.82% 2.15% 2.32%
1.96%
Telecommunication organizations................................Organizations 9.27% 7.46% 5.69%
5.16%
Associate Members..............................................Members 0.96% 0.53% 0.56%
0.56%
------- ------- -------
Total.....................................................Total 100.00% 100.00% 100.00%
======= ======= =======
CFC's members are distributed throughout the United States and its territories,
including 46 states, the District of Columbia, Guam, Samoa and the U.S. Virgin
Islands. At May 31, 1995, 1994 1993 and 19921993 no state or territory had over 8.2%9.1%,
8.8%8.2%, and 8.5%8.8%, respectively, of total loans and guarantees outstanding.
CFC believes that the risk of lending to a single industry is mitigated
somewhat by the fact that many of CFC's borrowers as utilities do not have
immediate competition in the sale of their services and the fact that the
services members provide are essential to the consumers.
Credit Concentration
In addition to the geographic diversity of the portfolio, CFC limits its
exposure to any one single borrower. The majority of the largest single
exposures are concentrated in the Power Supply systems due to their large
plant and equipment requirements. At May 31, 1994,1995, the total exposure
outstanding to any one 32
35
borrower did not exceed 5.2%4.8% of total loans excluding
loans guaranteed by RUS and guarantees outstanding and the total loans and
guarantees outstanding to the members ofin any one state or territory did not
exceed 8.2%9.1%. At May 31, 1994,1995, CFC had $1,558$1,754 million in loans outstanding,
excluding loans guaranteed by RUS, and $2,584$2,511 million in guarantees
outstanding to its largest 40 borrowers, representing 25% of total loans
outstanding and 97% of total guarantees outstanding. Credit exposure to the
largest 40 borrowers represented 47%45% of total credit exposure at May 31, 1994,1995,
compared to 50%47% at May 31, 1993.1994. CFC's ten largest ten credit exposures
represented 29%26% and 31%29% of total exposure at May 31, 19941995 and 1993,1994,
respectively.
Security Provisions
Except when providing lines of credit, CFC typically lends to its members on a
secured basis. At May 31, 1994,1995, approximately 4.80%6.55% of CFC's total loans and
guarantees were unsecured obligations of CFC borrowers. CFC's long-term loans
are typically secured pro-rata with other secured lenders, if any (primarily
REA)RUS), by all assets and future revenues of the borrower. Short-term loans are
generally unsecured lines of credit. Guarantees are secured on a pro-rata
basis with other secured creditors, by all assets and future revenues of the
borrower or by the underlying financed asset. In addition to the collateral
received, CFC also requires that its borrowers set rates designed to achieve
certain financial ratios.
35
Portfolio Quality
The following table summarizes the key composite operating results of CFC's
two main borrower types, distribution and power supply systems, which together
comprise 89.9%87.9% and 91.4%89.9% of CFC's total loan and guarantee portfolio at
May 31, 19941995 and 19931994 (the table has not been weighted based on CFC's
outstanding loans and guarantees to the borrowers):
CFC DISTRIBUTION MEMBER BORROWERS
COMPOSITE RESULTS
CFC Distribution Member Borrowers
Composite Results
1993 1992 1991 1990
----- ----- -----
TIER....................................................TIER 2.54 2.19 2.11
2.15
DSC.....................................................DSC 2.44 2.07 2.13
2.16
Equity percentage.......................................percentage 40.83% 39.44% 38.18%
37.32%
CFC POWER SUPPLY MEMBER BORROWERS
COMPOSITE RESULTS
CFC Power Supply Member Borrowers
Composite Results
1993 1992 1991
1990
----- ----- -----
TIER....................................................TIER 1.20 1.14 1.14 1.08
DSC.....................................................1.15
DSC 1.21 1.23 1.25 1.221.26
Equity percentage....................................... 8.00% 7.36% 6.49%percentage 9.68% 8.03% 9.25%
- - ---------------
NOTE: The composite member data is as of December 31, of the year indicated.
Data for December 31, 1993, was not available prior to the date of this
filing. The power supply composite results have been presented without the
operating results of foursix systems experiencing financial difficulties. CFC
had credit exposure to four of the six borrowers (see footnote 10 to the
combined financial statements for a detailed description of these borrowers).
Most CFC power supply borrowers sell the majority of their power under
all-power-requirements contracts with their member distribution systems.
These contracts allow, subject to regulatory requirements, for the recovery
of all costs at the power supply level. Due to the contractual connection
between the power supply and distribution systems, total combined system
equity (power supply equity plus the equity at its affiliated distribution
systems) has typically been maintained at the distribution level.
As with CFC, to the extent distribution systems can fund their assets with
retained members' 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.
33
36
The effectiveness of the all-power-requirements 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. Some states regulate rate setting and can
therefore override the system's internal rate setting procedures. However,
most CFC members are not externally rate regulated. CFC has 833838 distribution
members of which 586590 are not regulated. Of the remaining 247248 distribution
systems, 153166 are regulated only on a streamlined basis. At the power supply
level, 4744 of 6665 members are not rate regulated.
During the past few years, power supplyPower Supply members have been increasing their
equity levels. Under recently changed REARUS underwriting standards, in order to
qualify for additional REARUS loan funds, power supplyPower Supply systems may be required to
maintain, or demonstrate an ability to reach, a 20% of assets equity level, or
they must obtain guarantees from their affiliated distribution systems.36
Nonperforming and Restructured Loans
CFC classifies a borrower as nonperforming when any one of the following
criteria are met: (1) principal or interest payments on any loan to the
borrower are past due 90 days or more, (2) the borrower is operating under
protection of the bankruptcy court, or (3) for some other reason, management
does not expect the timely repayment of principal or interest. Once a
borrower is classified as nonperforming, interest on its loans is recognized
on a cash basis. Alternately,Alternatively, CFC may choose to apply all cash received to
the reduction of principal, thereby forgoing interest income recognition. At
May 31, 1994,1995, nonperforming loans totaled $44.9$27.6 million, a decrease of $10.9$17.3
million over the prior year-end. The decrease was due to the reclassificationrepayment of
loans tofrom two members totaling $8.9
million, (including $5.9 million reclassified as performing and $3.0 million
reclassified as restructured).borrowers out of proceeds from the sale of the systems' assets.
CFC did not write off any amounts on the settlement of these loans. At May
31, 1994,1995, nonperforming loans represented 0.5%0.3% of total loans and guarantees
outstanding.
Loans classified as restructured are loans for which agreements have been
executed that change the original terms of the loan, generally a change to the
originally scheduled cashflows. At May 31, 1994,1995, restructured loans totaled
$165.4$185.0 million, a decreasean increase of $7.5$19.6 million from the prior year. Restructured
loans in the amount of $131.1 million, $111.5 million $100.3 million and $81.2$100.3 million were
not accruing interest income at May 31, 1995, 1994 1993 and 1992,1993, respectively.
The majority of CFC's problem loan situations occurredbegan prior to the past five
years as a result of excess capacity or cancelled capacity additions after
the plant and equipment construction cycle of the mid-1980s. Since 1986, when
power supply construction-in-progress represented 16.3% of total power supply
plant, power supply members have reduced the level of plant additions. At the
end of the calendar year 1992, construction-in-progress represented 2.8% of
total power supply plant (see Note 10 to Combined Financial Statements for a
more complete discussion of certain loan and guarantee contingencies).
NONPERFORMING AND RESTRUCTURED ASSETS
(DOLLAR AMOUNTS IN MILLIONS)
AS OF MAYNONPERFORMING AND RESTRUCTURED ASSETS
(Dollar Amounts In Millions)
As of May 31,
--------------------------1995 1994 1993 1992
------ ------ ------
Nonperforming loans.................................................loans $ 27.6 $ 44.9 $ 55.8 $ 17.0
Percent of loans and guarantees outstanding.........................outstanding 0.29% 0.51% 0.69%
0.21%
Restructured loans..................................................loans $185.0 $165.4 $172.9 $145.6
Percent of loans and guarantees outstanding.........................outstanding 1.94% 1.89% 2.14% 1.81%
Allowance for Loan and Guarantee Losses
CFC maintains an allowance for potential loan and/orand guarantee losses which is
periodically reviewed by management for adequacy. In performing this
assessment, management considers various factors including an analysis of the
financial strength of CFC's borrowers, delinquencies, loan charge-off history,
underlying 34
37
collateral, and economic and industry conditions. At May 31, 1994,1995,
the allowance for loan and guarantee losses totaled $188.2$205.6 million, an
increase of $15.6$17.4 million from the prior year-end. The allowance represented
238.6%744.9% of nonperforming loans and 2.1%2.2% of total loans and guarantees
outstanding at year-end.
Since its inception in 1969, CFC has charged off loan balances in the total
amount of $28.4 million, net of recoveries.
Management believes that the allowance for loan and guarantee losses is
adequate to cover any portfolio losses which have occurred or may occur.
37
The following chart presents a summary of the allowance for loan and guarantee
losses at May 31, 1995, 1994 1993 and 1992.
ALLOWANCE FOR LOAN AND GUARANTEE LOSSES
(DOLLAR AMOUNTS IN THOUSANDS)1993.
YEAR ENDED MAYALLOWANCE FOR LOAN AND GUARANTEE LOSSES
(Dollar Amounts In Thousands)
Year Ended May 31,
------------------------------1995 1994 1993 1992
-------- -------- --------
Beginning balance.............................................balance $188,196 $172,571 $157,571 $135,599
Provision for loan and guarantee losses.......................losses 17,400 15,625 15,000
27,000
Charge-offs................................................... -- -- (8,602)
Recovery of amounts previously charged-off.................... -- -- 3,574
-------- -------- --------
Ending balance................................................balance $205,596 $188,196 $172,571 $157,571
======== ======== ========
As a percentage of loans and guarantees outstanding...........outstanding 2.16% 2.15% 2.13% 1.96%
ASSET/LIABILITY MANAGEMENTAsset/Liability Management
A key element of CFC's funding operations is the monitoring and management of
interest rate and liquidity risk. This process involves controlling asset and
liability volumes, repricing terms and maturity schedules to stabilize gross
operating margins and retain liquidity.
Interest Rate Risk
CFC is subject to interest rate risk to the extent CFC's loans are subject to
interest rate adjustment at different times than the liabilities which fund
those assets. Therefore, CFC's interest rate risk management policy involves
the close matching of asset and liability repricing terms within a range of
5% of gross assets (total assets plus the loan and guarantee loss allowance
which is netted against gross loans on the balance sheet). CFC measures the
matching of funds to assets by comparing the amount of fixed rate assets
repricing or amortizing to the total fixed rate debt maturing over the next
year. At May 31, 19941995 CFC had $196$193 million in fixed rate assets amortizing or
repricing and $55$66 million in fixed rate liabilities maturing during fiscal
year 1995.1996. The difference, $141$127 million, represents the amount of CFC's
assets that are not considered match-funded as to rate. CFC's difference of
$141$127 million at May 31, 19941995 represents 2.2%1.8% of grosstotal assets. CFC funds
variable rate assets which reprice monthly with short-term liabilities,
primarily Commercial Paper and Bank Bid Notes, both of which are primarily
issued with original maturities under 90 days. CFC funds fixed rate loans
with fixed rate Collateral Trust Bonds, Medium-Term Notes, Subordinated
Certificates and Members' Equity. With the exception of Subordinated
Certificates, which are generally issued at rates below CFC's long-term cost
of funding and with extended maturities, CFC's liabilities have average
maturities that closely match the repricing terms of CFC's fixed interest
rate loans. CFC also uses Commercial Paper supported by interest rate
exchange agreements to fund its fixed rate portfolio of loans.
Certain of CFC's Collateral Trust Bonds and Medium-Term Notes were issued with
early redemption provisions. To the extent borrowers are allowed to convert
their fixed rate loans to a variable interest rate and to the extent it is
beneficial, CFC takes advantage of these early redemption privileges. However,
because 35
38
conversions can take place at different intervals from early
redemptions, CFC charges conversion fees designed to compensate for any
additional interest rate risk assumed by the Company.
38
Interest-Rate Gap Analysis
(Fixed Assets/Liabilities)
As of May 31, 1995
(Dollar Amounts In Millions)
Over 1 yr. Over 3 yrs. Over 5 yrs. Over 10 yrs.
Less than but less but less but less but less Over
1 year than 3 yrs. than 5 yrs. than 10 yrs. than 20 yrs. 20 yrs. Total
Assets:
Loan Amortization
and repricing $192.6 $405.5 $506.0 $501.0 $420.0 $104.3 $2,129.6
Total Assets $192.6 $405.5 $506.0 $501.0 $420.2 $104.3 $2,129.6
Liabilities and Equity:
Long-Term Debt $ 59.2 $652.3 $ 30.5 $ 60.0 $ 33.6 $150.0 $ 985.6
Subordinated Certificates 6.9 14.5 255.7 420.5 232.4 56.4 986.4
Equity 0 0 158.3 20.5 52.0 0 230.8
Total Liabilities and Equity $ 66.1 $666.8 $444.5 $501.0 $318.0 $206.4 $2,202.8
Gap * $126.5 $(261.3) $ 61.5 $ 0.0 $102.2 $(102.1) $ (73.2)
Cumulative Gap $126.5 $(134.8) $(73.3) $(73.3) $ 28.9 $ (73.2)
Cumulative Gap as a %
of Total Assets 1.79% 1.90% 1.03% 1.03% 0.41% 1.03%
* Loan amortization/repricing over/(under) debt maturities
Liquidity
CFC is subject to liquidity risk, which includes market factors beyond its
control, to the extent cash repayments on its assets are insufficient to cover
the cash requirements on maturing liabilities and other sources of funds with
which to make debt repayments are not available. For the most part, CFC funds
its long-term loans with much shorter term maturity debt instruments. As a
result, CFC has to manage its liquidity risk by ensuring that other sources of
funding are available to make debt maturity payments. CFC accomplishes this
in four ways. First, CFC maintains revolving credit agreements which (subject
to certain conditions) allow CFC to borrow funds on terms of up to threefive years.
Second, CFC has maintained investment grade ratings, facilitating access to
the capital markets. Third, CFC maintains shelf registrations for both
Collateral Trust Bonds and Medium-Term Notes either of which (absent market
disruptions and assuming CFC remains creditworthy) could be issued at fixed
or variable rates in sufficient amounts to fund the next 18 to 24 months,
funding requirements. Fourth, CFC obtains much of its funding directly from
its members and believes this funding is more stable than funding obtained
from outside sources.
CFC's long-andlong- and short-term debt and guarantees receive ratings from three of
the major credit rating agencies, Moody's Investors Service ("Moody's"),
Standard and Poor Corporation ("S&P") and Fitch Investors Service ("Fitch").
During May 1994, S&P and Fitch upgraded CFC's ratings on Collateral Trust
Bonds from AA- to AA and the ratings on Medium-Term Notes, guaranteed lease
debt and guaranteed bonds from A+ to AA-. CFC's short-term debt and guarantee
ratings from these agencies were reaffirmed at the highest level A-1+ by S&P
and F-1+ by Fitch. Moody's reaffirmed CFC's current ratings, and lists CFC's
ratings outlook as positive. The following table presents CFC's current
credit ratings at year-end.
39
STANDARDMoody's Standard & POOR'S
MOODY'S INVESTORS SERVICE CORPORATION FITCH INVESTORS SERVICE
-------------------------- ------------------ ------------------------Poor's Fitch
Investors Service Corporation Investors Service
DIRECTDirect
Collateral Trust Bonds................Bonds Aa3 AA AA
Medium-Term Notes.....................Notes A1 AA- AA-
Commercial Paper......................Paper P1 A-1+ F-1+
GUARANTEESGuarantees
Leveraged Lease Debt..................Debt A1 AA- AA-
Pooled Bonds..........................Bonds Aa3 AA- AA-
Other Bonds...........................Bonds A1 AA- AA-
Short-Term............................Short-Term P1 A-1+ F-1+
The ratings listed above have the meaning as defined by each of the respective
rating agencies and are not recommendations to buy, sell or hold securities
and are subject to revision or withdrawal at any time by the rating
organizations.
36
39
At May 31, 19941995 and 1993,1994, CFC's members provided 44.3%41.7% and 52.0%44.3% of total
capitalization as follows:
MEMBERSHIP CONTRIBUTIONS TO TOTAL CAPITALIZATION
(DOLLAR AMOUNTS IN THOUSANDS)
AS OF MAYMEMBERSHIP CONTRIBUTIONS TO TOTAL CAPITALIZATION
As of May 31,
---------------------------------------------(Dollar Amounts In Thousands) % OFof % OFof
1995 Total 1994 TOTAL 1993 TOTAL
----------- ------- ----------- -------Total
Commercial Paper....................................Paper $1,049,474 27.0% $ 999,549 29.2%
$ 1,114,798 50.7%
Long-TermLong-term debt (primarily Medium-Term Notes)........ 366,662 29.2% 233,983 23.1%
200,613 14.8%
Subordinated Certificates...........................Certificates 1,234,715 100.0% 1,222,858 100.0%
1,215,547Members' Equity 270,221 100.0%
Members' Equity..................................... 260,968 100.0%
258,299 100.0%
----------- -----------
Total.......................................... $ 2,717,358 $ 2,789,257
========= =========Total $2,921,072 $2,717,358
Percentage of total capitalization..................capitalization 41.7% 44.3% 52.0%
========= =========
The total amount of member investments decreasedincreased by $71.9$203.7 million or 2.6%7.5%.
The total member investment as a percentage of total capitalization decreased
due to the increase in nonmember debt required to fund the increase in loans
outstanding. Total capitalization at May 31, 19941995 was $6,133.9$7,003.2 million, an
increase of $774.1$869.3 million over the total capitalization of $5,359.8$6,133.9 million
at May 31, 1993.1994. When the loan and guarantee loss allowance is added to both
membership contributions and to total capitalization the percentages of
membership investments to total capitalization are 46.0%43.4% and 53.5%46.0% at May 31,
1995 and 1994, and 1993, respectively.
HISTORICAL RESULTS40
Historical Results
The following chart provides CFC's key operating results over the last six
years.
SELECTED KEY FINANCIAL DATA
(DOLLAR AMOUNTS IN THOUSANDS)
SELECTED KEY FINANCIAL DATA
(Dollar Amounts In Thousands)
1995 1994 1993 1992 1991 1990 1989
---------- ---------- ---------- ---------- ---------- ----------
As of May 31:
Net loans.................................loans $6,747,124 $5,921,022 $5,112,471 $5,003,095 $4,827,497 $4,628,329
$4,311,227
Total liabilities.........................liabilities $5,575,853 $4,740,470 $3,990,298 $3,933,682 $3,715,123 $3,546,772
$3,240,332
Total Subordinated Certificates and Members' Equity.........................Equity $1,504,936 $1,483,826 $1,473,846 $1,467,791 $1,424,501 $1,417,194
$1,384,359
Guarantees................................Guarantees $2,574,922 $2,655,827 $2,813,731 $2,876,074 $2,884,393 $2,837,117
$2,870,502
Leverage ratio (1)........................ 5.13 4.63 4.41 4.44 4.43 4.29
4.20
Debt/Equity (2)........................... 3.01 2.52 2.24 2.24 2.19 2.12 1.98
For the period ended May 31:
Gross margins.............................margins $78,771 $ 61,452 $ 70,975 $ 87,392 $ 79,020 $ 69,979
$ 70,480
Net margins...............................margins $45,212 $ 33,188 $ 38,487 $ 44,155 $ 45,505 $ 39,273
$ 38,848
TIER (3).................................. 1.13 1.13 1.16 1.14 1.14 1.14 1.11 1.12
- - ---------------
(1) The leverage ratio is calculated by dividing debt and guarantees
outstanding, excluding debt used to fund loans guaranteed by REA,RUS, by the
total of Members' Subordinated Certificates and Members' Equity.
(2) The debt/equity ratio is calculated by dividing debt outstanding,
excluding debt used to fund loans guaranteed by REA,RUS, by the total of
Members' Subordinated Certificates, Members' Equity and the loan and
guarantee loss allowance.
(3) TIER is calculated by dividing net margins before extraordinary items
plus the cost of funds by the cost of funds.
FINANCIAL AND INDUSTRY OUTLOOKFinancial and Industry Outlook
During the coming year, management expects CFC's borrowers to continue to
utilize the variable interest rate programs to a greater extent than the fixed
interest rate program. This is due primarily to the positive
37
40 interest yield
curve and due partly to CFC's borrowers diversifying the interest terms on
their long-term debt. As the demand for variable interest rate loans
increases, either through conversions from the fixed interest rate program or
through new loan advances, CFC will continue to match fund these loans as to
rate with variable interest rate debt instruments and will continue to redeem,
to the extent possible and economically beneficial, its fixed interest rate
debt instruments. These fixed rate loans at the borrower level typically
represent a small portion of the borrower's overall capitalization.
On March 22, 1994 the final regulations regarding the prepayment of REARUS notes
at a discount were adopted. As of May 31, 1994, no members had prepaid their
loans under these regulations. During the first quarter of fiscal year 1995, CFC expects to advanceadvanced
approximately $142$370 million to five borrowers for the purpose of prepaying their REARUS
loans. At May 31, 1995, RUS had applications for an additional $394 million
of note buyouts. To date CFC has made 94% of the loan advances for RUS note
buyouts. Future volume of REARUS note prepayments will depend on a number of
factors including interest rates, tax consequences and possible acquisition or
other business opportunities available to the members. CFC does not expect
large volumes of prepayment requests to be made at any one time, but believes
that there will be a steady stream of activity.
Over the last year,During 1994, two large telecommunications companies, GTE and U.S. West, were
in the process of divesting properties in various areas of the country.
During fiscal yearyears 1994 and 1995, CFC extended approximately $400$600 million in
loan commitments, through RTFC, to telecommunications members that had
submitted bids on these properties. The increase in telephone loans
outstanding as of May 31, 19941995 was due to the advance of loans for the
acquisition of these properties. To date a total of $302.1$364.0 million has been
advanced to RTFC members that had their bids for property accepted by GTE,
U.S. West and other independent telecommunication companies. Loan activity to
telecommunications members should continue strong through the next fiscal
year, as the remaining telecommunication properties are acquired. The level
of growth experienced during fiscal yearyears 1994, 1995 and expected in fiscal
year 19951996 is due to the telecommunication members taking advantage of specific
opportunities and should not be seen as a continuing trend.
41
As discussed previously, REARUS has proposed to amend its lending requirements
for power supply systems, requiring them to either increase their equity
levels or obtain guarantees from their affiliated distribution systems. To
the extent these systems require capital and this capital is unavailable from
REA,RUS, some might be able to enter the public debt markets without the assistance
of a financial intermediary. As a result, management believes that REA'sRUS's new
requirements may reduce CFC's potential lending and guarantee volume with CFC's
larger, more creditworthy power supply members.
The amount of loan funds available from REARUS to its borrowers is dependent upon
the size of the congressionally allocated subsidy for REA'sRUS's revolving loan
fund and the current interest rates. As interest rates rise, a larger portion
of the subsidy is required to buydownbuy down the interest rate, reducing the total
amount of funding available for new loans. As the level of loan funds
available decreases, borrowers will be required to seek out additional sources
for loan funds.
ITEMItem 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.Financial Statements and Supplementary Data.
The Combined Financial Statements, Auditors' Report and Combined Quarterly
Financial Results are included on pages F-150 through F-2777 (see Note 12 to Combined
Financial Statements for a summary of the quarterly results of CFC's
operations).
ITEMItem 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
38
41
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
(a) Identification of Directors
DATE
PRESENT
DIRECTOR TERM
NAME AGE SINCE EXPIRES
- - ------------------------------------------------------------- --- ---- ----PART III
Item 10. Directors and Executive Officers of the Registrant.
(a) Directors
Director Date present
Name Age since term expires
Bill McGinnisJ. Chris Cariker (President of CFC)............................. 48 1988 1995
J. Chris Cariker 41 1991 1997
Garry Bye (Vice President of CFC)..................... 40 52 1991 1997
Garry ByeRalph L. Loveless (Secretary-Treasurer of CFC)....................... 51 1991 1997 55 1990 1996
John C. Anderson............................................. 57Anderson 58 1990 1996
Johnnie R. Austin............................................ 59 1989 1995
Robert J. Bauman.............................................Bauman 50 1992 1998
Bill Bertram 49 1992 1995
Bill Bertram................................................. 48 1990 1996
Harold I. Dycus.............................................. 61Dycus 62 1991 1997
Glenn English................................................ 53English 54 1994 1997
John B. Floyd, Jr............................................ 51 1989Nadine Griffin 63 1992 1998
Benson Ham 61 1995 Nadine Griffin............................................... 62 1992 19951998
Ralph Harmeyer............................................... 63Harmeyer 64 1993 1996
Gordon J. Hudson............................................. 58Hudson 59 1991 1997
David Hutchens 56 1995 1998
George W. Kline.............................................. 65Kline 66 1993 1996
Paul J. Liess................................................ 56Liess 57 1993 1996
Ralph L. Loveless............................................ 54 1990 1996
GeraldRobert H. McClurg 65 1995 1998
R. Layne Morrill 55 1995 1998
Gerard P. Paolucci........................................... 59Paolucci 60 1994 1997
David E. Piper............................................... 52 1989 1995
Terry Pitchford.............................................. 50Pitchford 51 1991 1997
J.C. Roberts................................................. 56 1993Henry Umscheid 62 1995 Tom Sloan.................................................... 64 1989 19951998
Robert O. Williams........................................... 61Williams 62 1994 1997
Eldwin Wixson 63 1995 1998
42
(b) Identification of Executive Officers
HELD PRESENT
TITLE NAME AGE OFFICE SINCE
- - ------------------------------------------ ----------------------- --- ------------Held present
Title Name Age office since
President and Director.................... Bill McGinnis 48 1993Director J. Chris Cariker 41 1995
Vice President and Director............... J. Chris Cariker 40 1994Director Garry Bye 52 1995
Secretary-Treasurer and Director.......... Garry Bye 51 1994Director Ralph L. Loveless 55 1995
Governor and Chief Executive Officer...... Charles B. Gill 56 1979
Assistant to the Governor and Acting
Administrative Officer..................Officer Sheldon C. Petersen 41 199342 1995
Senior Vice President and General Counsel.................................Counsel John Jay List 47 199148 1980
Senior Vice President and Loan Officer....of Member Services Richard B. Bulman 5253 1984
Senior Vice President and Chief Financial Officer.................................Officer Steven L. Lilly 45 1994
Senior Vice President for Strategic Services David J. Hedberg 44 1994
Controller................................ Angelo M. Salera 55 19751995
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.
39
42
(d) Family Relationships.
No family relationship exists between any director or executive officer and
any other director or executive officer of the registrant.
(e) (1) and (2) Business Experience and Directorships.
In accordance with Article IV of CFC's Bylaws, each candidate for election to
the Board of Directors must be a trustee, director or manager of a member of
CFC.
Mr. McGinnis has been the General Manager of Denton County Electric
Cooperative, Inc., Denton, TX since 1980. He was President of Texas
Electric Cooperative, Inc., Austin, TX from 1984 to 1985.
Mr. Cariker has been General Manager of Cookson Hills Electric Cooperative,
Stigler, OK, since 1982. He is a Director of the Oklahoma Association of
Electric Cooperatives and a Director of the Haskell County Development
Authority. He is also an alternate trustee for KAMO Electric Cooperative.
Mr. Bye has been General Manager of East Central Electric Association, Braham,
MN, since 1985. He has been a Director for RTFC since February 1994 and Vice
President since February 1995. He is a former member of the North Dakota House
of Representatives. He is also a member, and former chairman, of the Minnesota
State Board of Electricity and is presently Chairman of the Minnesota Rural
Electric Association's Government Affairs Committee.
Mr. Loveless has been the Executive Vice President and General Manager of
Meriwether Lewis Electric Cooperative, Centerville, TN, since 1987. He
served as Assistant General Manager of Meriwether Lewis Electric Cooperative
from 1985 to 1987. He is a member of the Board of Directors and the
Legislative and Tax Committee of the Tennessee Electric Cooperative
Association.
Mr. Anderson has been President and CEO of Southside Electric Cooperative,
Crewe, VA and a Director of Old Dominion Electric Cooperative, Glen Allen, VA
since 1982. He has been a member of the Virginia, Maryland & Delaware
Association of Electric Cooperatives since 1982. He was Chairman of the NRECA
Cooperative Research Committee from 1982 to February 1990. He was elected to
the Board of Directors of Vedcorp, an economic development corporation, and
elected to the Crewe, VA, Industrial Development Committee, in May 1991. Mr.
Anderson was appointed to the Southside Virginia Business and Education
Commission in 1992.
Mr. Austin has been a Director of Blue Ridge EMC, Lenoir, NC since
1970. Since 1984 he has been President of Blue Ridge EMC, and held the
office of Vice President prior to 1984. He has been a Director of North
Carolina EMC (G&T), Raleigh, NC, since 1989 and serves on the Executive
Committee. He served as a Director of NC Association of Electric
Cooperatives, Raleigh, NC from 1970 until 1989, and served as President
from March 1983 to March 1984. He has been a Director of First Union
National Bank, Boone, NC since 1971. He has been owner and Manager of
Reins-Sturdivant Funeral Directors, Boone, NC since 1975.
Mr. Bauman has been the General Manager of Butler County Rural Electric
Cooperative, Allison, IA, since 1984. He is a member of the Corn
Belt Power Cooperative Industrial Development Committee and the Iowa Association
of Business and Industry's Economic Development Committee.Committee and a Board member
of Cooperative Development Services, Madison, WI.
Mr. Bertram has been a farmer in Valley City, ND, since 1964. He has been a
Director of North Dakota Association of Rural Electric Cooperatives, Mandan,
ND, since 1988 and Secretary of Cass County Electric Cooperative, Inc.,
Kindred, ND, since 1986. 43
Mr. Dycus has been a partner and co-owner of Dycus, Bradley & Draves, P.C., a
regional public accounting firm, since 1973. He has been a Director of
Egyptian Electric Cooperative, Steeleville, IL, since 1976 and a Director of
Southern Illinois Power Cooperative since 1981.
Mr. English has been Executive Vice President and General Manager of NRECA,
Washington, DCD.C., since February 1994. He served in the House of
Representatives from 1975 to 1994. He served on the House Agriculture
Committee from 1975 to 1994, and was Chairman of the House Agricultural
Subcommittee on Environment Credit and Rural Development in 1989.
Mr. Floyd has been Vice Chairman of Oconee Electric Membership
Corporation, Dudley, GA, since 1970. He has been Vice President since 1968
and a Director since 1969 of The Four County Bank. He has been a Director
of Oglethorpe Power Corporation, Tucker, GA, and President and Chairman of
Twiggs Gin Inc., a cotton gin, since 1973.
Mrs. Griffin has been a Director of D.S.& O. Rural Electric Cooperative
Association, Abilene, KS, since 1987. She is a member of the National Rural
Electric Women's Association, and has been a Rural Electric Director for 15
years. She is presently serving as a member of the Board of Directors of the
40
43
Kansas City Board of Trade. She served as a member of the Kansas Wheat
Commission and is a member of the Kansas Association of Wheat Growers. She
has been a member of the KEPCoKEPCO Executive Committee and a former chair on the
KEPCoKEPCO Power Supply Planning and Operation Committee. She also serves as a
member of the Board of Directors of KARL, Inc. (Kansas Agriculture and Rural
Leadership Program).
Mr. Ham has been a Director of Central Georgia Electric Membership Cooperative,
Jackson, GA, since 1983. He has also been Directorthe managing partner in the law
firm of bothHam, Jenkins, Wilson & Wangerin, since 1991. He is a partner in
Sleepy Creek Farms, a commercial cow-calf operation established in 1983. He
also served for ten years in the DickinsonGeorgia Legislature. He is currently a
member of the Monroe County Extension Council ExecutiveEconomic Development Authority. He has served, as
President, on the Flint Judicial Circuit Bar Association from 1962 to 1963 and
has served on the Board andof Governors of the Dickinson County Historical Society Board.Georgia Bar Association.
Mr. Harmeyer has been a Director of the Indiana Statewide Association of Rural
Electric Cooperatives, Indianapolis, IN, since 1976. He has also been a
Director for Decatur County REMC, Greensburg, IN, since 1958. He is a past
member of CFC's nominating committee. He was a Director of the Indiana Rural
Cooperative Federal Credit Union from 1978 to 1981. He has been Chairman of
Harmeyer Farms, Inc., since 1985. He is Chairman of the Napoleon State Bank
and a past Board Chairman of the Ripley County Farm Bureau Co-op and the Ripley
County Soil & Water Conservation Board. He is a past delegate for Milk
Marketing, Inc.
Mr. Hudson has owned and operated the Leonard Paul Store, a general store,
since 1978. He has sold real estate in the Priest Lake, ID area since 1989.
He has been President of Northern Lights, Inc., Sandpoint, ID, since 1984.
Mr. Hutchens has been Executive Director of Alaska Rural Electric Cooperative
Association, Anchorage, AK, since January 1979. He was Chairman of Ruralite
Services, Inc. from April 1993 to April 1995 and a past President of the Rural
Electric Statewide Managers Association. He was an instructor at Hardin-Simmons
University during 1962 and an Oklahoma State Legislator from 1964 to 1970 .
Mr. Kline has been a Director of Trico Electric Cooperative, Tucson, AZ, since
1988. He has been Vice President of Grand Canyon State Electric Cooperative
Association, since 1992. He was a part-time Magistrate for the town of
Marana, AZ, from 1983 to 1993.
Mr. Liess has been General Manager of Twin Valleys Rural Public Power District,
Cambridge, NE, since 1978. He has been an alternate Director of the Nebraska
Rural Electric Association ("NREA") and the Nebraska Electric Generation and
Transmission Cooperative, Inc., since 1979. He has been Chairmanchairman of the
Nebraska ACRE Board since 1991 and vice-chairmanVice-Chairman of the NREA Credit Union
Board since 1989. He is a member and one of five original founders of Five
District Joint Venture, developers of Rural Power Manager Software. Mr.
Liess has been a member of the Board of Governors of the Central Community
College since 1989. He is a member of the Board of Directors of the Central
Plains Technical and Business Development Center and Chairman of the Cambridge
Economic Development Board.
Mr. LovelessMorrill has been the Executive Vice Presidenta Director, and General Managercurrently Secretary-Treasurer, of Meriwether LewisWhite
River Valley Electric Cooperative, Centerville, TN,Inc., Branson, MO, since 1987.1976. He served as Assistant General Manageris also
a Director of Meriwether LewisKAMO Electric Cooperative from 1985 to 1987.Cooperative. He has been President of Shepherd of
the Hills Realty Co., Inc., since 1967 and President of Shepherd of the Hills
Properties Inc., since 1967. He is also been 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.
44
Mr. McClurg has been a Director of NRECA, Washington, DC since 1982 and
President since 1995. He has been a Director of Wyoming Rural Electric
Association since 1974 and a Director of the Tri-State G&T, Denver, CO, since
1990. He is a memberformer Director of the Board of DirectorsCentral Bank and the Legislative and Tax Committee of the Tennessee Electric Cooperative
Association.Trust.
Mr. Paolucci has been General Manager of Morrow Electric Cooperative, Inc., Mount
Gilead, OH, Inc., since 1977. He has been President of Astrostar, Inc. since
it was established in 1986. In addition he is presently Chairman of the
United Utility Supply Cooperative Corporation and has served as its Vice
Chairman. He has also served as Trustee for Buckeye Power, Inc. since 1983.
Mr. Piper has been the General Manager of Pacific Northwest Generating
Cooperative, Portland, OR, since 1979. He is a Director of the Pacific
Northwest Utilities Conference Committee and was a member of the NRECA
Water Power Committee from 1987 to 1991. He has been a member of the
National Preference Customer Committee since 1983 and is presently
President of the G&T Managers Association.
Mr. Pitchford has owned and operated a farm in Columbia, AL, since 1971. He
has been a Director of Pea River Electric Cooperative, Ozark, AL, since 1987.
Mr. RobertsUmscheid has been a DirectorGeneral Manager of NRECA, Washington, DCBluebonnet Electric Cooperative,
Giddings, TX, since 1980
and1965. He has been President of Texas VI Satellite, Inc.,
since February 1993.1988. He has been a Director of Golden Spread
Electric Cooperative, Amarillo, TX since 1984 and was Board Chairman from
1987 to 1988. He is a member and past president of the Bellville Industrial
Foundation, and a past director of the First National Bank of Bellville andGiddings
since 1981. He is also a past President of the Bellville Hospital Foundation.
Mr. Sloan has been a Director of CraigheadTexas Electric Cooperative
Jonesboro, AR, since 1962, and he was President from 1975 to 1989. He was a
Director of Arkansas Electric Cooperative Corporation
41
44
and Arkansas Electric Cooperatives, Inc., both of Little Rock, AR, from
1975 to 1989. He was a Director of Electric Research and Manufacturing
Cooperative, Dyersburg, TN, from 1984 to 1989. He was a Director of
Citizens National Bank, Walnut Ridge, AR, from 1968 to 1990. He has been a
farmer and farm manager since 1956. He was a Director of SF Services, Inc.,
a farmers association, from 1967 to 1992, and was Chairman of the Board
from 1986 to 1992. He has been a Director of Arkansas Blue Cross and Blue
Shield since 1978.Statewide Association.
Mr. Williams has been Executive Vice President and General Manager of York
Electric Cooperative, York, SC, since 1974. He has been a trustee for both
the Saluda River Electric Cooperative, Laurens, SC, and the Electric
Cooperatives of South Carolina since 1974. He was a trustee for the South
Carolina State Development Board from 1991 to 1993 and a trustee for the York
Technical College Foundation Board from 1983 to 1991.
Mr. Gill joinedWixson has been a Director of New Hampshire Electric Cooperative, Inc.,
Plymouth, NH, since June 1986 and President since June 1992. Mr. Wixson has
been a professor of mathematics at Plymouth State College, of the CFC staff in April 1972 as Borrowers Operations
Officer.University
System of New Hampshire, since 1966 and 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 and served as Deputya Director of the Speare
Memorial Hospital. Previously, he was the principal-controlling partner of
the Plymouth Pharmacy from 1979 to 1982 and was a Maine dairy farmer from 1956
to 1963.
Mr. Petersen joined CFC in August 1983 as an Area Representative. He became
the Director of Policy Development and Internal Audit in January 1990, then
Director of Credit Analysis in November 1990 and Corporate Secretary on June
1, 1992. He became Assistant to the Governor from 1978on May 1, 1993. He became
Assistant to 1979 prior to being
namedthe Governor effective September 1979.and Acting Administrative Officer on June 1, 1994.
He became Governor and CEO on March 1, 1995.
Mr. List joined CFC as a staff attorney in February 1972. He served as
Corporate Counsel from June 1980 until 1991 and served as General Counsel until
May 1992. He became Senior Vice President and General Counsel on June 1, 1992.
Mr. Bulman joined the CFC staff as Power Supply Officer in March 1980. He has
served as Loan Officer since June 1, 1984. He became Senior Vice President
and Loan Officer on June 1, 1992. Mr. Salera joined CFC's staff as Controller in September 1975.
Mr. Petersen joined CFC in August 1983 as an Area Representative. He became the DirectorSenior Vice President of Policy Development and Internal Audit in January
1990, then Director of Credit Analysis in November 1990 and Corporate
SecretaryMember
Services on June 1, 1992. He became Assistant to the Governor on May 1,
1993. He became Assistant Governor and Acting Administrative Officer on
June 1, 1994.1995.
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
(f) Involvement in Certain Legal Proceedings.
None to the knowledge of CFC.
(g) Promoters and control persons.
Inapplicable.
ITEM 405. COMPLIANCE WITH SECTION 16 (A) OF THE EXCHANGE ACT.
Inapplicable.
42
45
ITEMItem 405. Compliance with Section 16 (a) of the Exchange Act.
Inapplicable.
Item 11. EXECUTIVE COMPENSATIONExecutive Compensation
The Summary Compensation Table below sets forth the aggregate renumeration
for services in all capacities to CFC, on an accrual basis, for the three
years ended May 31, 1995, 1994 1993 and 19921993 to the named executive officers.
The named executive officers include the CEO and the next four most highly
compensated executive officers serving at May 31, 1994,1995, with salary and
bonus for fiscal year 19941995 in excess of $100,000.
SUMMARY COMPENSATION TABLE
LONG-TERM COMPENSATION
--------------------------------
ANNUAL COMPENSATION AWARDS
---------------------------- -------------------- PAYOUTS
OTHER RESTRICTED OPTIONS/ ---------- ALL
ANNUAL STOCK SARSSummary Compensation Table
Annual Compensation Long-Term Compensation
Awards Payouts
Other Restricted Options/ All
Annual Stock SARs LTIP OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMP(1) AWARD(2)Other
Name and Principal Position Year Salary Bonus Comp (1) Award(2) (#)(2) PAYOUTS(2) COMP(3)
- - ----------------------------- ----- -------- ------- ------- ---------- -------- ---------- --------Payouts(2) Comp(3)
Charles B. Gill.............. 1994 $286,021 $20,702 -- -- -- -- $144,419Gill (4) 1995 $311,549 $5,990 - - - - $168,450
Governor and Chief 1994 286,021 20,702 - - - - 144,419
Executive Officer 1993 284,833 5,433 -- -- -- --- - - - 115,063
Sheldon C. Petersen (5) 1995 155,257 1,911 - - - - 51,715
Governor and Chief
Executive Officer
1992 276,819 5,144 -- -- -- -- --
Richard B. Bulman............Bulman 1995 173,179 3,243 - - - - 18,274
Senior Vice President of 1994 167,184 3,073 -- -- -- --- - - - 16,115
Member Services 1993 154,071 5,941 - - - - 6,769
John J. List 1995 149,621 2,574 - - - - 9,876
Senior Vice President and 1993 154,071 5,941 -- -- -- -- 6,769
Loan Officer 1992 148,316 2,794 -- -- -- -- --
John J. List................. 1994 144,405 2,515 -- -- -- --- - - - 10,101
General Counsel 1993 138,256 2,505 - - - - 9,489
Steven L. Lilly 1995 169,331 3,173 - - - - 12,336
Senior Vice President and 1993 138,256 2,505 -- -- -- -- 9,489
General Counsel 1992 137,318 2,121 -- -- -- -- --
Steven L. Lilly.............. 1994 138,884 2,006 -- -- -- --- - - - 9,460
Chief Financial Officer 1993 107,696 1,906 - - - - 8,055
David J. Hedberg 1995 109,548 1,901 - - - - 9,588
Senior Vice President and 1993 107,696 1,906 -- -- -- -- 8,055
Chief Financial Officer 1992 103,220 6,320 -- -- -- -- --
Nicholas J. Walsh(4) ........ 1994 128,916 0 -- -- -- -- 7,558
Senior Vice President and 1993 124,136 0 -- -- -- -- 11,398
Administrative Officer 1992 118,305 0 -- -- -- -- --for
Strategic Services
- - ---------------
(1) Reportable perquisites and other personal benefits do not exceed $50,000
or 10% of salary and bonus. All other items reportable under this column
are not applicable to CFC.
(2) Not applicable to CFC.
(3) Amounts for fiscal years, 1995, 1994 and 1993 include $99,321, $90,292 and
$63,750 related to an employment contract described under "Employment
Contracts and Termination of Employment and Change-In-Control
Arrangements", $62,899, $48,147 and $45,616 related to leave accruals and
$6,230, $5,980 and $5,697 related to CFC contributions to savings plan for
Mr. Gill; $30,000 related to an employment contract described under
"Employment Contracts and Termination of Employment and Change-in-Control
Arrangements", $19,039 related to leave accruals and $2,676 related to CFC
contributions to savings plan for Mr. Petersen; $14,811, $12,771 and
$3,688 related to leave accruals and $3,463, $3,344 and $3,081 related
to CFC contributions to savings plan for Mr. Bulman; $6,886, $7,213 and
$6,724 related to leave accruals and $2,990, $2,888 and $2,765 related
to CFC contributions to savings plan for Mr. List; $8,949, $6,682 and
$5,901 related to leave accruals and $3,387, $2,778 and $2,154 related to
CFC contributions to savings plan for Mr. Lilly; and $4,980 and $8,915$7,303 related to leave
accruals and $2,578 and $2,483$2,285 related to CFC contributions to savings plan for Mr.
Walsh, respectively.Hedberg.
(4) Mr. Walsh retired effective May 31, 1994.
DEFINED BENEFIT OR ACTUARIAL PLAN DISCLOSURECharles B. Gill served as Governor and CEO through February 28, 1995.
(5) Sheldon C. Petersen has served as Governor and CEO from March 1, 1995.
46
Defined Benefit or Actuarial Plan Disclosure
NRECA also maintains the Retirement and Security Program entitling CFC employees to
receive, under a 50% joint and surviving spouse annuity, 1.90% of the average
of their five highest base salaries during their last ten years of employment,
multiplied by the number of years of participation in the program. As of May
31, 1994,1995, the number of years of service credited and the compensation covered
under the program, respectively, for the officers listed above was as follows:
Charles B. Gill -- 21Gill-22 years 2 months, $260,834;$281,350; Steven L. Lilly -- 10Lilly-11 years 8
months, $105,003;$120,812; John Jay List -- 21List-22 years 3 months, $129,650;$137,124; Richard B.
Bulman -- 14Bulman-15 years 2 months, $142,088; Nicholas J. Walsh -- 22$155,893; Sheldon C. Petersen-11 years 5 month,
$117,868.
43
46
PENSION PLAN TABLEmonths,
$93,949; David J. Hedberg-13 years, $94,008.
YEARS OF SERVICE
AVERAGE ---------------------------------------------------------------------------
BASE SALARYPension Plan Table
Years of Services
Average base salary 5 10 15 20 25 30
- - ---------------------- ------- ------- ------- -------- -------- --------
$100,000..............$100,000 $ 9,500 $19,000 $28,500 $ 38,000 $ 47,500 $ 57,000
125,000..............125,000 11,875 23,750 35,625 47,500 59,375 71,250
150,000..............150,000 14,250 28,500 42,750 57,000 71,250 85,500
175,000..............175,000 16,625 33,250 49,875 66,500 83,125 99,750
200,000..............200,000 19,000 38,000 57,000 76,000 95,000 114,000
225,000..............225,000 21,375 42,750 64,125 85,500 106,875 118,800*
250,000..............118,800 *
250,000 23,750 47,500 71,250 95,000 118,750 118,800*
275,000..............118,800 *
275,000 26,125 52,250 78,375 104,500 118,800* 118,800*118,800 *
- - ---------------
* The*The Tax Reform Act of 1984 places a cap on maximum salary used to compute
retirement benefits and maximum yearly benefit. For calendar year 1994,1995, the
salary cap is $150,000 (the cap represents the amount of salary for 19941995 that
may be used in the computation of the average base salary) and benefits cap is
$118,800.
The Budget Reconciliation Act of 1993 has set a limit of $150,000 on the
1994
compensation to be used in the calculation of pension benefits. In order to
restore potential lost benefits, CFC has set up a Pension Restoration Plan.
Under the plan, the amount that NRECA invoices CFC will continue to be based
on the full compensation paid to each employee. Upon the retirement of a
covered employee, NRECA will calculate the retirement and security benefit to
be paid with consideration of the compensation limits and will pay the maximum
benefit thereunder. NRECA will also calculate the retirement and security
benefit that would have been available without consideration of the
compensation limits and CFC will pay the difference. NRECA will then give CFC
a credit against future retirement and security contribution liabilities in
the amount paid by CFC to the covered employee.
CFC will pay such additional benefits to the covered employee through a
Severance Pay Plan and a Deferred Pay Restoration Plan. Under the Severance
Pay Plan, the employee is paid an amount equal to the lost pension benefits
but not to exceed twice the employee's annual compensation for the prior year.
The benefit must be paid within 24 months of termination of employment. To
the extent that the Severance Pay Plan cannot pay all of the lost pension
benefits, the remainder will be paid under a Deferred Compensation Plan, which
will be paid out in a lump sum or in installments of up to 60 months.
COMPENSATION OF DIRECTORSCompensation of Directors
No director received any renumeration as an officer or director of CFC.
Directors are reimbursed for travel expenses and receivedreceive a daily per diem to
cover meals and lodging for their attendance at all Board of Directors
functions.
EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL
ARRANGEMENTSEmployment Contracts and Termination of Employment and Change-In-Control
Arrangements
Under a supplemental benefit agreement entered into as of April 1, 1989, and
amended as of April 1, 1993, CFC agreed to employ Mr. Gill, and Mr. Gill
has
agreed to remain as a CFC employee, for six years commencing April 1, 1989,
and
for future periods that may be agreed upon, at no less than his present compensation (as of April 1, 1993). Provided he does not earlier resign and is
not discharged for cause, CFC has agreed
to pay Mr. Gill, after his normal retirement date in 2000 or such earlier retirement datedother date
as agreed to by the Board of Directors, or earlier death or disability, a sum
ranging from $17,500 commencing in 1983 to $32,500 beginning in 1986 for each
year he is employed by CFC (or in the case of death or disability, for each
year he would have been so employed (since 1983) until such date, subject, in
the case of disability, to certain offsets or other payments) with interest at
the rate of 10% per annum until payment. The agreement also provides to Mr.
Gill eight weeks of paid vacation per year, which will accrue and be paid if
unused. Mr. Gill has
informed CFC of his intention to retireretired as of April 1, 47
1995. The Board has agreed that this date will be treated as his normal
retirement date under the supplemental benefit agreement. 44
47
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATIONIt is anticipated
that the accumulated amounts will be paid out in two installments, the first
of which will be in January 2000.
Under a supplemental benefit agreement entered into as of February 26, 1995,
CFC has agreed that on March 1, 1995 and on each succeeding January 1 for as
long as Mr. Petersen shall be employed by CFC, CFC shall credit the sum of
$30,000 to a bookkeeping account for Mr. Petersen. CFC also agrees that on
December 31, 1995 and each December 31 thereafter, interest will be credited
to the account in an amount equal to the balance of the amount multiplied by
the then current 20-year Medium-Term Note interest rate offered by CFC. The
amount credited to the account will be paid to Mr. Petersen in a lump sum no
later than January 15 of the year following his scheduled retirement date.
In the event of Mr. Petersen's death or disability, CFC shall pay to Mr.
Petersen or his beneficiary the total amount in the account on the January 1
following his death or disability. No benefits will be paid if Mr. Petersen
is terminated for cause or due to reason other than death or disability does
not continue his employment at CFC until his retirement date.
Compensation Committee Interlocks and Insider Participation
During the year ended May 31, 19941995 the following directors and former directors
of CFC served as members on the Operating Review and Audit Committee of the
Board of Directors (which functions as the Board's compensation committee):
Bill McGinnis (President of CFC)
John M. McBride (Former Director and Former Vice President of CFC)
John B. Floyd, Jr.
David E. Piper
J.E. Smith (Former Director and Former President of CFC)
Robert J. Bauman
David E. Piper (Former Director of CFC)
Bill Bertram
J. Chris Cariker (Vice( President of CFC)
Garry Bye (Secretary-Treasurer(Vice President of CFC)
Harold I. Dycus
Ralph L. Loveless (Secretary-Treasurer of CFC)
Terry Pitchford
Johnnie R. Austin (Former Secretary-TreasurerDirector of CFC)
Other than those mentioned above, there were no compensation committee
interlocks or insider participation related to executive compensation.
ITEMItem 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.Security Ownership of Certain Beneficial Owners and Management.
Inapplicable.
ITEM 48
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.Certain Relationships and Related Transactions.
(a), (b) and (c) At May 31, 1994,1995, CFC had commitments for long-andlong- and
intermediate-term loans aggregating $53$246 million and $205$184 million,
respectively, and committed lines of credit aggregating $346$348 million, to
member systems, excluding NCSC, RTFC and GFC, of which executive officers or
directors of CFC are members, employees, officers or directors. At May 31,
1994, $1931995, $231 million and $70$33 million of advances were outstanding with respect
to such long-andlong- and intermediate-term loans, respectively, and $24$80 million was
outstanding under such lines of credit. At May 31, 1994,1995, CFC had guaranteed
$246$171 million of contractual obligations of such members. CFC had commitments
to NCSC for long-term loans of $15$12 million and CFC had outstanding guarantees
of certain contractual obligations in the amount of $764$688 million at May 31,
1994,1995, on behalf of NCSC. At May 31, 1994,1995, advances outstanding with respect
to such long-term loans were $48 million for NCSC. Such loans and guarantees
were made in the ordinary course of CFC's business on the same terms, including
interest rates and collateral, as those prevailing at the time for comparable
transaction with other members and did not involve more than normal risk of
uncollectibility or present other unfavorable features. It is anticipated
that, consistent with its loan and guarantee policies in effect from time to
time, additional loans and guarantees will be made by CFC to member systems
and trade and service organizations of which officers or directors of CFC are
members, employees, officers or directors. In light of its cooperative nature,
pursuant to which CFC was established for the very purpose of extending
financing to its members (from whose ranks its directors must be drawn), CFC
is of the view that no purpose would be served by including detaileddetaile
d information with respect to specific loans and guarantees to members with
which any of its directors are affiliated.
(d) Inapplicable.
45
48
PART IV
ITEMItem 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORMExhibits, Financial Statement Schedules, and Reports on Form 8-K.
(A) DOCUMENTS FILED AS A PART OF THIS REPORT.(a) Documents filed as a part of this report.
1. FINANCIAL STATEMENTS
PAGE
-----
Report of Independent Public Accountants..................................... F-1
Combined Balance Sheets...................................................... F-2
Combined Statements of Income, Expenses and Net Margins...................... F-4
Combined Statements of Changes in Members' Equity............................ F-5
Combined Statements of Cash Flows............................................ F-6
Notes to Combined Financial Statements....................................... F-7
Financial statements
Page
Report of Independent Public Accountants 50
Combined Balance Sheets 51
Combined Statements of Income, Expenses and Net Margins 53
Combined Statements of Changes in Members' Equity 54
Combined Statements of Cash Flows 55
Notes to Combined Financial Statements 56
2. FINANCIAL STATEMENT SCHEDULES
PAGE
-----
Note 12 to Combined Financial Statements "Combined Quarterly Financial
Results"................................................................... F-27
Financial statement schedules
Page
Note 12 to Combined Financial Statements "Combined Quarterly
Financial Results" 77
All other schedules are omitted because they are not required or inapplicable
or the information is included in the financial statements or notes thereto.
46
49
3. EXHIBITS
3.1 -- Articles of Incorporation. Incorporated by reference to Exhibit 3.1 to
Registration Statement No. 2-46018, filed October 12, 1972.
3.2 --Exhibits
3.1 - Articles of Incorporation. Incorporated by reference to Exhibit
3.1 to Registration Statement No. 2-46018, filed October 12, 1972.
3.2 - Bylaws. Incorporated by reference to Exhibit 3.2 to CFC's annual
report on Form 10-K for the year ended May 31, 1988, filed July
27, 1988.
3.3 - Amendments to Bylaws as approved by CFC's Board of Directors and
members on February 11, 1993, and a copy of the Bylaws as
amended. Incorporated by reference to Exhibit 3.3 to CFC's
annual report on Form 10-K for the year ended May 31, 1993, filed
August 18, 1993.
3.4 - Amendments to Bylaws as approved by CFC's Board of Directors and
members on February 28, 1995, and a copy of the Bylaws as amended.
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 First Bank National Association, 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.
- Registrant agrees to furnish to the Commission a copy of all
other instruments defining the rights of holders of its long-term
debt upon request.
Management Contracts and Compensatory Plans and Arrangements.
10.1 - Plan Document for CFC deferred compensation program.
Incorporated by reference to Exhibit 10 to Registration Statement
No. 2-70355, filed December 23, 1980.
10.2 - Supplemental Benefit Agreement between CFC and Charles B. Gill
dated January 11, 1983, as amended. Incorporated by reference
to Exhibit 10.2 to CFC's annual report on Form 10-K for the
year ended May 31, 1983.
10.3 - Second Amendment to Supplemental Benefit Agreement between CFC
and Charles B. Gill dated May 29, 1986. Incorporated by
reference to Exhibit 10.3 to CFC's annual report on Form 10-K for
the year ended May 31, 1986.
10.4 - Third Amendment to Supplemental Benefit Agreement between CFC
and Charles B. Gill dated April 1, 1989. Incorporated by
reference to Exhibit 10.4 to CFC's annual report on Form 10-K
for the year ended May 31, 1989.
10.5 - Fourth Amendment to Supplemental Benefit Agreement between CFC
and Charles B. Gill dated April 1, 1993. Incorporated by
reference to Exhibit 10.5 to CFC's annual report on Form 10-K
for the year ended May 31, 1993.
10.6 - Fifth Amendment to Supplemental Benefit Agreement between CFC
and Charles B. Gill dated May 26, 1994. Incorporated by
reference to Exhibit 10.6 to CFC's annual report on Form 10-K
for the year ended May 31, 1994.
10.7 - Supplemental Benefits Agreement between CFC and Sheldon C.
Petersen, dated as of February 26, 1995.
12 - Computations of ratio of margins to fixed charges.
23 - Consent of Arthur Andersen LLP
27 - Financial Data Schedules
(b) Reports on Form 10-K for the year ended May 31, 1988, filed July 27, 1988.
3.3 -- Amendments to Bylaws as approved by CFC's Board of Directors and members
on February 11, 1993, and a copy of the Bylaws as amended. Incorporated
by reference to Exhibit 3.3 to CFC's annual report on Form 10-K for the
year ended May 31, 1993, filed August 18, 1993.
4.1 -- Form of Capital Term Certificate. Incorporated by reference to Exhibit
4.3 Registration Statement No. 2-46018 filed October 12, 1972.
4.2 -- Revolving Credit Agreements dated May 28, 1993. Incorporated by reference
to Exhibit 4.6 to Form 10-K filed August 23, 1993.
4.3 -- Indenture dated as of February 15, 1994, between the Registrant and First
Bank National Association, trustee. Incorporated by reference to Exhibit
4.1 to the current report on Form 8-K filed by CFC on June 14, 1994.
4.4 -- Amendments to Revolving Credit Agreement dated May 17, 1994.
-- Registrant agrees to furnish to the Commission a copy of all other
instruments defining the rights of holders of its long-term debt upon
request.
Management Contracts and Compensatory Plans and Arrangements.
10.1 -- Plan Document for CFC deferred compensation program. Incorporated by
reference to Exhibit 10 to Registration Statement No. 2-70355, filed
December 23, 1980.
10.2 -- Supplemental Benefit Agreement between CFC and Charles B. Gill dated
January 11, 1983, as amended. Incorporated by reference to Exhibit 10.2
to CFC's annual report on Form 10-K for the year ended May 31, 1983.
10.3 -- Second Amendment to Supplemental Benefit Agreement between CFC and
Charles B. Gill dated May 29, 1986. Incorporated by reference to Exhibit
10.3 to CFC's annual report on Form 10-K for the year ended May 31, 1986.
10.4 -- Third Amendment to Supplemental Benefit Agreement between CFC and Charles
B. Gill dated April 1, 1989. Incorporated by reference to Exhibit 10.4 to
CFC's annual report on Form 10-K for the year ended May 31, 1989.
10.5 -- Fourth Amendment to Supplemental Benefit Agreement between CFC and
Charles B. Gill dated April 1, 1993. Incorporated by reference to Exhibit
10.5 to CFC's annual report on Form 10-K for the year ended May 31, 1993.
10.6 -- Fifth Amendment to Supplemental Benefit Agreement between CFC and Charles
B. Gill dated May 26, 1994.
12 -- Computations of ratio of margins to fixed charges.
23 -- Consent of Arthur Andersen & Co.
(B) REPORTS ON FORM 8-K.
No reports on Form 8-K were filed during the last quarter of
fiscal year 1994.
471995.
50
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized, in
the County of Fairfax, Commonwealth of Virginia, on the 5thth day of
August, 1994.1995.
NATIONAL RURAL UTILITIES COOPERATIVE
FINANCE CORPORATION
By: /s/ CHARLES B. GILL
--------------------------------------
Charles B. GillSheldon 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
- - ----------------------------------------------- ---------------------------- ----------------
Signature Title Date
/s/ SHELDON C. PETERSEN Governor and Chief Executive
Sheldon C. Petersen Officer
/s/ STEVEN L. LILLY Senior Vice President and
Steven L. Lilly Chief Financial Officer
/s/ ANGELO M SALERA Controller (Principal
Angelo M. Salera Accounting Officer)
/s/ J. CHRIS CARIKER President and Director
J. Chris Cariker
/s/ GARRY BYE Vice President and Director
Garry Bye
/s/ RALPH L. LOVELESS Secretary-Treasurer and
Ralph L. Loveless Director August , 1995
/s/ JOHN C. ANDERSON Director
John C. Anderson
/s/ ROBERT J. BAUMAN Director
Robert J. Bauman
/s/ CHARLES B. GILL Governor and Chief Executive
- - ----------------------------------------------- Officer
CHARLES B. GILL
/s/ STEVEN L. LILLY Senior Vice President and
- - ----------------------------------------------- Chief Financial Officer
STEVEN L. LILLY
/s/ ANGELO M. SALERA Controller (Principal
- - ----------------------------------------------- Accounting Officer)
ANGELO M. SALERA
/s/ BILL MCGINNIS President and Director
- - -----------------------------------------------
BILL MCGINNIS
/s/ J. CHRIS CARIKER Vice President and Director
- - -----------------------------------------------
J. CHRIS CARIKER
August 5, 1994
/s/ GARRY BYE Secretary-Treasurer and
- - ----------------------------------------------- Director
GARRY BYE
/s/ JOHN C. ANDERSON Director
- - -----------------------------------------------
JOHN C. ANDERSON
/s/ JOHNNIE R. AUSTIN Director
- - -----------------------------------------------
JOHNNIE R. AUSTIN
/s/ ROBERT J. BAUMAN Director
- - -----------------------------------------------
ROBERT J. BAUMAN
/s/ BILL BERTRAM Director
- - ----------------------------------------------- BILL BERTRAM
48Director
Bill Bertram
/s/ HAROLD I. DYCUS Director
Harold I. Dycus
/s/ GLENN ENGLISH Director
Glenn English
51
SIGNATURE TITLE DATE
- - ----------------------------------------------- ---------------------------- ----------------
Signature Title Date
/s/ NADINE GRIFFIN Director
Nadine Griffin
/s/ BENSON HAM Director
Benson Ham
/s/ RALPH HARMEYER Director
Ralph Harmeyer
/s/ GORDON J. HUDSON Director
Gordon J. Hudson
/s/ DAVID HUTCHENS Director
David Hutchens
/s/ HAROLD I. DYCUS Director
- - -----------------------------------------------
HAROLD I. DYCUS
/s/ GLENN ENGLISH Director
- - -----------------------------------------------
GLENN ENGLISH
/s/ JOHN B. FLOYD, JR. Director
- - -----------------------------------------------
JOHN B. FLOYD, JR.
/s/ NADINE GRIFFIN Director
- - -----------------------------------------------
NADINE GRIFFIN
/s/ RALPH HARMEYER Director
- - -----------------------------------------------
RALPH HARMEYER
/s/ GORDON J. HUDSON Director
- - -----------------------------------------------
GORDON J. HUDSON
- - ----------------------------------------------- Director
GEORGE W. KLINE
/s/ PAUL J. LIESS Director
- - ----------------------------------------------- PAUL J. LIESS
Director August 5, 1994
, 1995
Paul J. Liess
/s/ ROBERT H. McCLURG Director
Robert H. McClurg
/s/ R. LAYNE MORRILL Director
R. Layne Morrill
/s/ GERARD P. PAOLUCCI Director
Gerard P. Paolucci
/s/ GEORGE W. KLINE Director
George W. Kline
/s/ TERRY PITCHFORD Director
Terry Pitchford
/s/ HENRY UMSCHEID Director
Henry Umscheid
/s/ RALPH L. LOVELESS Director
- - -----------------------------------------------
RALPH L. LOVELESS
/s/ GERALD P. PAOLUCCI Director
- - -----------------------------------------------
GERALD P. PAOLUCCI
/s/ DAVID E. PIPER Director
- - -----------------------------------------------
DAVID E. PIPER
/s/ TERRY PITCHFORD Director
- - -----------------------------------------------
TERRY PITCHFORD
/s/ J. C. ROBERTS Director
- - -----------------------------------------------
J. C. ROBERTS
/s/ TOM SLOAN Director
- - -----------------------------------------------
TOM SLOAN
/s/ ROBERT O. WILLIAMS Director
- - ----------------------------------------------- ROBERT O. WILLIAMS
49Director
Robert O. Williams
/s/ ELDWIN WIXSON Director
Eldwin Wixson
52
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
NATIONAL RURAL UTILITIES COOPERATIVE
FINANCE CORPORATION:
We have audited the accompanying combined balance sheets of National Rural
Utilities Cooperative Finance Corporation (a not-for-profit corporation under
the District of Columbia Cooperative Association Act) and other related
entities as discussed in Note 1 as of May 31, 19941995 and 1993,1994, and the related
combined statements of income, expenses and net margins, changes in members'
equity and cash flows for each of the three years in the period ended May 31,
1994.1995. These financial statements are the responsibility of the Companies'
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of National Rural Utilities
Cooperative Finance Corporation and other related entities as of May 31, 19941995
and 1993,1994, and the results of their operations and their cash flows for each of
the three years in the period ended May 31, 1994,1995, in conformity with generally
accepted accounting principles.
ARTHUR ANDERSEN & CO.LLP
Washington, D.C.D. C.
July 18, 1994
F-119, 1995
53
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
COMBINED BALANCE SHEETS
(DOLLAR AMOUNTS IN THOUSANDS)
MAY 31, 1994 AND 1993
ASSETS
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
COMBINED BALANCE SHEETS
(Dollar Amounts In Thousands)
May 31, 1995 and 1994
1993
---------- ----------ASSETS
1995 1994
CASH................................................................CASH $ 26,309 $ 22,168
$ 55,450
---------- ----------MARKETABLE SECURITIES 30,000 0
DEBT SERVICE INVESTMENTS............................................INVESTMENTS 32,740 33,668 45,611
---------- ----------
LOANS TO MEMBERS, net...............................................net 6,747,124 5,921,022
5,112,471
---------- ----------
RECEIVABLES.........................................................RECEIVABLES 87,638 90,160 87,763
---------- ----------
FIXED ASSETS, net...................................................net 36,807 38,718 31,777
---------- ----------
DEBT SERVICE RESERVE FUNDS..........................................FUNDS 114,094 107,095
116,470
---------- ----------
OTHER ASSETS........................................................ASSETS 6,077 11,465
14,602
---------- ----------$7,080,789 $6,224,296 $5,464,144
========= =========
The accompanying notes are an integral part of these combined financial
statements.
F-2
54
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
COMBINED BALANCE SHEETS
(DOLLAR AMOUNTS IN THOUSANDS)
MAY
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
COMBINED BALANCE SHEETS
(Dollar Amounts In Thousands)
May 31, 1995 and 1994 AND 1993
LIABILITIES AND MEMBERS' EQUITY
1995 1994 1993
---------- ----------
NOTES PAYABLE, due within one year..................................year $1,812,570 $1,607,975
$ 503,624
---------- ----------
ACCOUNTS PAYABLE....................................................PAYABLE 16,705 18,529 18,019
---------- ----------
ACCRUED INTEREST PAYABLE............................................PAYABLE 39,343 35,597
47,822
---------- ----------
LONG-TERM DEBT......................................................DEBT 3,685,682 3,042,068
3,382,284
---------- ----------
OTHER LIABILITIES...................................................LIABILITIES 21,553 36,301 38,549
---------- ----------
COMMITMENTS, GUARANTEES AND CONTINGENCIES
MEMBERS' SUBORDINATED CERTIFICATES:
Membership Subscription Certificates........................... 640,520Certificates 637,129 640,520
Loan and Guarantee Certificates................................Certificates 597,586 582,338 575,027
---------- ----------
Total Members' Subordinated Certificates..................Certificates 1,234,715 1,222,858
1,215,547
---------- ----------
MEMBERS' EQUITY.....................................................EQUITY 270,221 260,968 258,299
---------- ----------
Total Members' Subordinated Certificates
and Members' Equity..................................................Equity 1,504,936 1,483,826
1,473,846
---------- ----------$7,080,789 $6,224,296 $5,464,144
========= =========
The accompanying notes are an integral part of these combined financial
statements.
F-3
55
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
COMBINED STATEMENTS OF INCOME, EXPENSES AND NET MARGINS
(DOLLAR AMOUNTS IN THOUSANDS)
FOR THE YEARS ENDED MAY
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
COMBINED STATEMENTS OF INCOME, EXPENSES AND NET MARGINS
(Dollar Amounts In Thousands)
For the Years Ended May 31, 1995, 1994 and 1993
1995 1994 1993 AND 1992
1994 1993 1992
-------- -------- --------
OPERATING INCOME--InterestINCOME-Interest on loans to members...........members $440,109 $324,682 $336,387
$402,255
Less--CostLess-Cost of funds.................................funds 361,338 263,230 265,412
314,863
-------- -------- --------
Gross operating margin.........................margin 78,771 61,452 70,975 87,392
-------- -------- --------
EXPENSES:
General, administrative and loan processing.........processing 19,568 16,668 17,623 17,583
Provision for loan and guarantee losses.............losses 17,400 15,625 15,000
27,000
-------- -------- --------
Total expenses.................................expenses 36,968 32,293 32,623
44,583
-------- -------- --------
Operating margin...............................margin 41,803 29,159 38,352
42,809
-------- -------- --------
NONOPERATING INCOME......................................INCOME 3,409 4,029 3,296 2,744
-------- -------- --------
NET MARGINS BEFORE EXTRAORDINARY LOSS....................LOSS 45,212 33,188 41,648
45,553
-------- -------- --------
EXTRAORDINARY LOSS....................................... --LOSS 0 0 (3,161)
(1,398)
-------- -------- --------
NET MARGINS..............................................MARGINS $ 45,212 $ 33,188 $ 38,487 $ 44,155
======== ======== ========
The accompanying notes are an integral part of these combined financial statements.
F-4
56
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
COMBINED STATEMENTS OF CHANGES IN MEMBERS' EQUITY
(DOLLAR AMOUNTS IN THOUSANDS)
FOR THE YEARS ENDED MAY 31, 1994, 1993 AND 1992
PATRONAGE
CAPITAL ALLOCATED
-------------------
GENERAL
EDUCATION UNALLOCATED RESERVE
TOTAL MEMBERSHIPS FUND MARGINS FUND OTHER
-------- ----------- --------- ----------- ------- --------NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
COMBINED STATEMENTS OF CHANGES IN MEMBERS' EQUITY
(Dollar Amounts In Thousands)
For the Years Ended May 31, 1995, 1994 and 1993
Patronage
Capital Allocated
General
Education Unallocated Reserve
Total Memberships Fund Margins Fund Other
Balance as of May 31, 1991............ $243,4911992 $246,328 $ 1,1441,181 $ 366289 $ 2,2612,289 $ 482 $239,238483 $242,086
Retirement of Patronage Capital..... (41,355) -- -- 28 (9) (41,374)Capital (26,864) 0 0 0 (373) (26,491)
Net Margins -- Allocated............ 44,155 -- (77) -- 10 44,222
Other............................... 37 37 -- -- -- --
-------- ----------- --------- ----------- ------- --------- Allocated 38,487 0 23 1 378 38,085
Other 348 66 0 (1) 0 283
Balance as of May 31, 1992............ 246,328 1,181 289 2,289 483 242,086
Retirement of Patronage Capital..... (26,864) -- -- -- (373) (26,491)
Net Margins -- Allocated............ 38,487 -- 23 1 378 38,085
Other............................... 348 66 -- (1) -- 283
-------- ----------- --------- ----------- ------- --------
Balance as of May 31, 1993............1993 258,299 1,247 312 2,289 488 253,963
Retirement of Patronage Capital.....Capital (29,459) -- -- --0 0 0 (295) (29,164)
Net Margins -- Allocated............- Allocated 33,188 --0 13 --0 302 32,873
Other...............................Other (1,060) 92 -- -- --0 0 0 (1,152)
-------- ----------- --------- ----------- ------- --------
Balance as of May 31, 1994............ $260,9681994 260,968 1,339 325 2,289 495 256,520
Retirement of Patronage Capital (34,184) 0 0 0 (177) (34,007)
Net Margins - Allocated 45,212 0 50 0 180 44,982
Other (1,775) 44 0 0 0 (1,819)
Balance as of May 31, 1995 $270,221 $ 1,3391,383 $ 325375 $ 2,289 $ 495 $256,520
========= ============ ========= =========== ======= =========
498 $265,676
The accompanying notes are an integral part of these combined financial statements.
F-5
57
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
COMBINED STATEMENTS OF CASH FLOWS
(DOLLAR AMOUNTS IN THOUSANDS)
FOR THE YEARS ENDED MAY
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
COMBINED STATEMENTS OF CASH FLOWS
(Dollar Amounts In Thousands)
For the Years Ended May 31, 1995, 1994 and 1993
1995 1994 1993 AND 1992
1994 1993 1992
----------- ----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net margins.................................................margins $ 45,212 $ 33,188 $ 38,487 $ 44,155
Add (deduct):
Provision for loan and guarantee losses................losses 17,400 15,625 15,000
27,000
Depreciation...........................................Depreciation 2,359 1,553 1,522
2,810
Amortization...........................................Amortization (15,940) (15,915) (10,402) (821)
Add (deduct) changes in accrual accounts:
Receivables............................................Receivables (2,880) (4,263) (10,955)
239
Accounts payable.......................................payable (1,824) 613 4,696
(809)
Accrued interest payable...............................payable 3,746 (12,225) (7,699)
(1,799)
Other..................................................Other 6,002 15,975 42,531 3,288
----------- ----------- -----------
Net cash flows provided by operating activities........activities 54,075 34,551 73,180 74,063
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Advances made on loans......................................loans (3,619,998) (2,382,839) (1,456,959) (1,414,658)
Principal collected on loans................................loans 2,776,496 1,558,662 1,332,584 1,212,060
Investment in fixed assets..................................assets (448) (8,494) (4,884) (722)
----------- ----------- -----------
Net cash flows used in investing activities............activities (843,950) (832,671) (129,259) (203,320)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Notes payable, net..........................................net 604,595 1,104,351 389,809
64,267Marketable Securities (30,000) 0 0
Debt service investments, net...............................net 928 11,944 55,127 (58,350)
Proceeds from issuance of long-term debt....................debt 476,233 172,293 158,245 355,808
Payments for retirement of long-term debt...................debt (232,798) (512,849) (522,077) (204,984)
Proceeds from issuance of Members' Subordinated Certificates..............................................Certificates 30,156 34,088 32,087 34,837
Payments for retirement of Members' Subordinated Certificates..............................................Certificates (19,603) (15,868) (21,342) (6,167)
Payments for retirement of patronage capital................capital (35,495) (29,121) (26,632) (40,987)
----------- ----------- -----------
Net cash flows provided by financing activities........activities 794,016 764,838 65,217
144,424
----------- ----------- -----------
NET CASH FLOWS..................................................FLOWS 4,141 (33,282) 9,138
15,167
BEGINNING CASH..................................................CASH 22,168 55,450 46,312
31,145
----------- ----------- -----------
ENDING CASH.....................................................CASH $ 26,309 $ 22,168 $ 55,450 $ 46,312
============ ============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during year for interest expense..................expense $ 360,308 $ 269,959 $ 275,950 $ 319,692
The accompanying notes are an integral part of these combined financial statements.
F-6
58
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS
MAYMay 31, 1995, 1994 and 1993
AND 1992
(1) GENERAL INFORMATION AND ACCOUNTING POLICIESGeneral Information and Accounting Policies
(a) General Information
National Rural Utilities Cooperative Finance Corporation (the "Company" or
"CFC") was incorporated as a private, not-for-profit cooperative association
under the laws of the District of Columbia in April 1969. The principal
purpose of CFC is to provide its members with a source of financing to
supplement the loan programs of the Rural Electrification AdministrationUtilities Service ("REA"RUS") of the
United States Department of Agriculture. CFC makes loans primarily to its
rural utility system members ("Utility Members") to enable them to acquire,
construct and operate electric distribution, generation, transmission and
related facilities. Most CFC long-term loans to Utility Members are made in
conjunction with concurrent loans from REARUS and are secured equally and ratably
with REA'sRUS'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 1,0391,046 members as of May 31, 1994,1995, included 899903 Utility Members,
virtually all of which are consumer-owned cooperatives, 7172 service members and
6971 associate members. The Utility Members included 833838 distribution systems
and 6665 generation and transmission ("Power Supply") systems operating in 46
states and U.S. territories. At December 31, 1992,1993, CFC's member systems
served approximately 12.212.4 million consumers, representing service to an
estimated 28.832.5 million ultimate users of electricity, and owned approximately
$60.8$62.6 billion (before depreciation of $16.4$17.9 billion) in total utility plant.
Rural Telephone Finance Cooperative ("RTFC") was incorporated as a private
cooperative association in the state of South Dakota in September 1987. RTFC
is a controlled affiliate of CFC and was created for the purpose of providing
and/or arranging financing for its rural telecommunication members and
affiliates. RTFC's bylaws require that the majority of RTFC's Board of
Directors be elected from individuals designated by CFC. CFC is the sole
source of funding for RTFC. As of May 31, 1994,1995, RTFC had 352388 members. RTFC
is a taxable entity under Subchapter T of the Internal Revenue Code and
accordingly takes deductions for allocations of net margins to its patrons.
Guaranty Funding Cooperative ("GFC") was incorporated as a private cooperative
association in the state of South Dakota in December 1991. GFC is a
controlled affiliate of CFC and was created for the purpose of providing a
source of funds for its members to refinance their REARUS guaranteed debt
previously held by the Federal Financing Bank. All trust certificates held by
GFC were transferred to GFC by CFC and are guaranteed by the REA.RUS. CFC is the
sole source of funding for GFC. GFC had four members other than CFC at
May 31, 1994.1995. GFC is a taxable entity under Subchapter T of the Internal
Revenue Code and accordingly takes deductions for allocations of net margins
to its patrons.
(b) Principles of Combination
The accompanying financial statements include the combined accounts of CFC,
RTFC and GFC, after elimination of all material intercompany accounts and
transactions. CFC has a $1,000 membership interest in both RTFC and GFC.
CFC exercises control over RTFC and GFC through majority representation on
their Boards of Directors. CFC manages the affairs of RTFC through a
long-term management agreement. CFC services the loans for GFC for which it
collects a servicing fee.
As of May 31, 1994,1995, CFC had committed to lend RTFC up to a total of $1.8$2.4
billion to fund loans to its members and their affiliates. As of the same
date, RTFC had outstanding loans and unadvanced loan F-7
59
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
commitments totaling
$1,135.4$1,215.1 million. RTFC's net margins are allocated to RTFC borrowers.
Summary financial information relating to RTFC included in the combined
financial statements is presented below:
59
AS OF MAYNATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS - (Continued)
As of May 31: 1995 1994
1993
-------- --------
(DOLLAR AMOUNTS IN
THOUSANDS)(Dollar Amounts In Thousands)
Outstanding loans to members and their affiliates............affiliates $883,463 $653,644
$460,864
Total assets.................................................assets 985,381 743,761 529,562
Notes payable to CFC.........................................CFC 883,463 653,644
460,864
Total liabilities............................................liabilities 892,717 663,810
467,062
Members' Equity(1)Equity (1) and Subordinated Certificates.............Certificates 92,664 79,951
62,500
FOR THE YEAR ENDED MAYFor the years ended May 31: 1995 1994 1993
1992
------- ------- -------
(DOLLAR AMOUNTS IN THOUSANDS)
(Dollar Amounts In Thousands)
Operating income.......................................income $54,639 $28,825 $28,183
$28,473
Net margins(2)......................................... 1,731margins (2) 2,110 4,545 1,506 4,460
- - ---------------
(1) The transfer of RTFC equity is governed by the South Dakota Cooperative
Association Act which provides that net margins shall be distributed and
paid to patrons. However, reserves may be created and credited to
patrons in proportion to total patronage. CFC has been the sole funding
source for RTFC's loans to its members. As CFC is not a borrower of RTFC
and is not expected to be in the foreseeable future, RTFC's net margins
would not be available to CFC in the form of patronage capital.
(2) RTFC's net margins for fiscal year 19941995 will be adjusted for the
allocation of patronage capital by CFC.
As of May 31, 1994,1995, CFC had loaned GFC $524.1$421.7 million to fund the purchase of
REARUS guaranteed trust certificates from CFC. Summary financial information
relating to GFC included in the combined financial statements is presented
below:
AS OF MAYAs of May 31: 1995 1994
1993
-------- --------
(DOLLAR AMOUNTS IN
THOUSANDS)(Dollar Amounts In Thousands)
Outstanding loans to members................................members $421,665 $524,081
$286,460
Total assets................................................assets 442,878 540,913 300,636
Notes payable to CFC........................................CFC 427,875 531,302
294,548
Total liabilities...........................................liabilities 440,410 539,521
299,953
Members' Equity.............................................Equity 2,468 1,392
683
FOR THE YEAR ENDED MAY 31, 1994 AND FOR THE PERIOD FROM
INCEPTION DECEMBER 24, 1991 THROUGH MAY 31, 1992:For the years ended May 31: 1995 1994 1993
1992
------- ------- ----
(DOLLAR AMOUNTS IN
THOUSANDS)
(Dollar Amounts In Thousands)
Operating income......................................... $16,667income $ 28,494 $ 16,667 $11,233
$775
Net margins(1)...........................................margins (1) 3,235 1,831 902 115
- - ---------------
(1) The transfer of GFC equity is governed by the South Dakota Cooperative
Association Act which provides that net margins shall be distributed and
paid to patrons. However, reserves may be created and credited to
patrons in proportion to total patronage. CFC has been the sole funding
source for GFC's loans to its members. As CFC is not a borrower of GFC
and is not expected to be in the foreseeable future, GFC's net margins
would not be available to CFC in the form of patronage capital.
Unless stated otherwise, references to CFC relate to CFC, RTFC and GFC on a
combined basis.
F-8
60
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)- (Continued)
(c) Amortization of Bond Discount and Bond Issuance Costs
Bond discount and bond issuance costs are amortized using the effective
interest method over the life of each bond issue.
(d) Nonperforming Loans
It is CFC's policy to classify a loan as nonperforming when it meets any of
the following criteria:
(i) Interest or principal payments are contractually past due 90 days or
more,
(ii) As a result of court proceedings, repayment in accordance with the
original terms is not anticipated, or
(iii) For other reasons, timely repayment is not expected.
(e) Allowance for Loan and Guarantee Losses
CFC maintains an allowance for loan and guarantee losses at a level believed
to be adequate in relation to the quality and size of its loans and guarantees
outstanding. It is CFC's policy to review periodically its loans and
guarantees and to make adjustments to the allowance as necessary. The
allowance is based on estimates, and accordingly, actual loan and guarantee
losses may differ from the allowance amount.
Activity in the allowance account is summarized as follows for the years
ended May 31:
1995 1994 1993
1992
-------- -------- --------
(DOLLAR AMOUNTS IN THOUSANDS)(Dollar Amounts In Thousands)
Balance at beginning of year.............................year $188,196 $172,571 $157,571 $135,599
Provision for loan and guarantee losses..................losses 17,400 15,625 15,000 27,000
Charge-offs (see Note 10)................................ -- -- (8,602)
Recovery of amounts previously charged-off (see Note
10).................................................... -- -- 3,574
-------- -------- --------
Balance at end of year...................................year $205,596 $188,196 $172,571 $157,571
======== ======== ========
(f) Fixed Assets
Buildings, aircraft, furniture and fixtures and related equipment are stated
at cost less accumulated depreciation and amortization of $5.4$7.7 million and
$4.2$5.4 million as of May 31, 19941995 and 1993,1994, respectively. Depreciation and
amortization expenses ($1.62.4 million, $1.5$1.6 million and $1.2$1.5 million in fiscal
years 1995, 1994 1993 and 1992,1993, respectively) are computed primarily on the
straight-line method over estimated useful lives ranging from 32 to 40 years.
(g) Recognition of Fee Income
In connection with its various loan, guarantee and other financing programs,
CFC may be entitled to receive certain fees. Such fees are generally designed
to compensate CFC for expenses associated with the related transactions.
CFC recognizes the income from such fees periodically over the term during
which it incurs the related expenses.
61
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS - (Continued)
(h) Financial Instruments with Off-Balance Sheet Risk
In the normal course of business, CFC is a party to financial instruments with
off-balance sheet risk both to meet the financing needs of its member
borrowers and to reduce its own exposure to fluctuations in interest rates.
These financial instruments include commitments to extend credit, standby
letters of credit, guarantees F-9
61
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
of members' obligations and interest rate
exchange agreements. Those instruments involve, to varying degrees, elements
of credit and interest rate risk in excess of the amounts recognized in the
combined balance sheets.
(i) Accounting by Creditors for Impairment of a Loan
In May 1993, the Financial Accounting Standards Board (the "FASB") released
Statement No. 114 "Accounting by Creditors for Impairment of a Loan." The
statement requires that impaired loans be measured based on the present value
of expected future cash flows discounted at the loan's effective interest
rate, observable market value or the fair value of the collateral. In October
1994, the FASB released Statement No. 118, "Accounting by Creditors for
Impairment of a Loan-Income Recognition and Disclosures". The statement
isamends FASB Statement No. 114 by eliminating the interest income recognition
provisions and changing the disclosure requirements. Both statements are
required to be implemented in fiscal years beginning after December 15, 1994
and will apply to loans that are, or become impaired, based on the provisions
of SFASFASB Statement No. 114, or that have certain restructuring agreements
executed on, or after the implementation date. CFC has elected not to
implement this statementthese statements early and management has not yet determined itsthe
impact on the financial statements.
(j) Employers' Accounting for Postemployment Benefits
In November 1992, the Financial Accounting Standards Board releasedCFC has implemented FASB Statement No. 112, "Employers' Accounting for
Postemployment Benefits." ThisThe statement requires employersaccrual accounting for
employee benefits that are paid after the termination of active employment but
prior to recognize the obligation to provide
postemployment benefits, if the obligation is attributable to employees'
services already rendered, employees' rights to those benefits accumulate or
vest, paymentretirement. The implementation of the benefits is probable, and the amount of the benefits can be
reasonably estimated. This statement is effective for fiscal years beginning
after December 15, 1994. CFC has elected not to implement this statement early.
However, management doesdid not expect the implementation to have a
material impact on theCFC's financial statements.
(k) Accounting for Certain Investments in Debt and Equity Securities
In May 1993, the Financial Accounting Standards Board releasedCFC has implemented FASB Statement No. 115, "Accounting for Certain
Investments in Debt and Equity Securities." ThisThe CFC investments covered by
this statement, requires that investments inat May 31, 1995, include the marketable securities and the
debt and equity securities beservice investments. These items have been recorded at fair value inamortized cost,
due to the statement of financial condition unless the reporting
enterprise has the positivecompany's intent and ability to hold the instrumentall investments to maturity.
If there is positive intent(l) Disclosure about Derivative Financial Instruments and ability to hold to maturity,Fair Value of
Financial Instruments
In October 1994, the instrument can be recognized using the amortized cost method.FASB released Statement No. 119, "Disclosure about
Derivative Financial Instruments and Fair Value of Financial Instruments."
This statement is
effectiverequires disclosure about the amounts, nature and terms of
derivative financial instruments. The statement must be implemented for
fiscal years beginningending after December 15, 1993.1994. CFC has elected
not to implementimplemented this
statement early, and management has not yet determinedas of May 31, 1995. CFC is neither a dealer nor a trader in
derivative financial instruments. CFC uses interest rate exchange agreements
to help manage its impact on the financial statements.
(l)interest rate risk.
(m) Memberships
Members are charged a one-time membership fee based on member class. CFC
Distribution System members (Class A), Power Supply System members (Class B),
NRECAnational associations of cooperatives (Class D) and Associate members (Class E)
all pay a $1,000 membership fee. CFC Service Organization members (Class C)
pay a $200 membership fee. RTFC voting members pay a $1,000 membership fee
and non-voting members pay a $100 membership fee. All GFC members pay a
$1,000 membership fee.
(m) 62
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS - (Continued)
(n) Reclassifications
Certain reclassifications of prior year amounts have been made to conform
with fiscal year 19941995 presentation.
(2) LOANS AND COMMITMENTSLoans and Commitments
Loans to members bear interest at rates determined from time to time by the
Board of Directors on the basis of CFC's cost of funds, operating expenses,
provision for loan and guarantee losses and the maintenance of reasonable
margin levels. In keeping with its not-for-profit, cooperative character,
CFC's policy is to set F-10
62
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
interest rates at the lowest levels it considers to be
consistent with sound financial management. Loans outstanding to members,
weighted average interest rates thereon and unadvanced commitments are
summarized by loan type as follows as of May 31:
1995 1994
1993
--------------------------------------- ---------------------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
LOANS INTEREST UNADVANCED LOANS INTEREST UNADVANCED
OUTSTANDING RATES COMMITMENTS(A) OUTSTANDING RATES COMMITMENTS(A)
----------- -------- -------------- ----------- -------- --------------
(DOLLAR AMOUNTS IN THOUSANDS)Weighted Weighted
(Dollar Amounts In Thousands) Average Average
Loans Interest Unadvanced Loans Interest Unadvanced
Outstanding Rates Commitments(A) Outstanding Rates Commitments(A)
Long-term fixed rate secured loans (B):
Distribution Systems....................Systems $1,645,551 7.68% $ 10,389 $1,502,454 7.69% $ 12,089
$1,604,275 8.14% $ 694,051
Power Supply Systems....................Systems 253,208 7.68% 1,214 273,186 7.56% 9,705
179,384 7.80% 148,329
Service Organizations (C)............... 81,521 9.27% 2,600 94,104 9.53% 11,461
90,090 9.85% 5,482
Associate Members.......................Members 1,569 10.25% 0 1,606 10.25% -- 1,628 10.25% --0
Telecommunication Organizations.........Organizations 141,144 8.98% 0 119,600 9.16% -- 130,552 9.33% --
----------- -------------- ----------- --------------0
Total long-term fixed rate secured loans..............................loans 2,122,993 7.83% 14,203 1,990,950 7.85% 33,255 2,005,929 8.27% 847,862
----------- -------------- ----------- --------------
Long-term variable rate secured loans (D):
Distribution Systems....................Systems 2,553,590 6.50% 730,453 2,172,799 4.65% 807,848
1,975,784 4.63% 48,640
Power Supply Systems....................Systems 191,967 6.50% 512,598 170,683 4.65% 436,147
178,095 4.63% 9,480
Service Organizations (C)............... 53,332 6.50% 67,887 39,487 4.65% 64,828
43,014 4.63% 169,404
Associate Members.......................Members 42,561 6.20% 39,959 29,089 4.45% 47,412
26,098 4.38% 47,520
Telecommunication Organizations.........Organizations 704,427 6.64% 130,627 499,506 4.92% 366,269 288,234 4.75% 78,910
----------- -------------- ----------- --------------
Total long-term variable rate secured loans......................loans 3,545,877 6.52% 1,481,524 2,911,564 4.69% 1,722,504 2,511,225 4.64% 353,954
----------- -------------- ----------- --------------
Refinancing variable rate loans
guaranteed by REA:RUS:
Power Supply Systems....................Systems 429,129 7.27% 0 533,545 4.87% -- 297,724 3.94% --
----------- -------------- ----------- --------------0
Intermediate-term secured loans:
Distribution Systems....................Systems 4,176 6.85% 2,300 4,112 4.90% 2,000
320 4.75% --
Power Supply Systems....................Systems 40,237 6.85% 158,759 21,316 4.90% 234,391
28,496 4.75% 355,568
Service Organizations...................Organizations 11,429 6.85% 3,705 2,099 4.90% 5,541
496 4.75% 11,676
Telecommunication Organizations......... -- -- --
----------- -------------- ----------- --------------Organizations 0 0 0 0 0 0
Total intermediate-term secured loans..............................loans 55,842 6.85% 164,764 27,527 4.90% 241,932 29,312 4.75% 367,244
----------- -------------- ----------- --------------
Intermediate-term unsecured loans:
Distribution Systems....................Systems 11,392 6.50% 17,693 13,046 4.90% 10,695
10,873 4.75% 13,575
Power Supply Systems....................Systems 47,443 6.50% 3,856 84,515 4.90% 22,376
-- -- --
Service Organizations................... -- --Organizations 0 0 0 0 0 70
11 4.75% --
Telecommunication Organizations.........Organizations 3,255 7.54% 2,370 1,265 5.05% 1,303
-- -- --
----------- -------------- ----------- --------------
Total intermediate-term unsecured loans..............................loans 62,090 6.56% 23,919 98,826 4.90% 34,444 10,884 4.75% 13,575
----------- -------------- ----------- --------------
Short-term loans (E):
Distribution Systems....................Systems 445,962 6.85% 2,032,220 276,373 4.90% 1,943,335
151,941 4.75% 1,735,088
Power Supply Systems....................Systems 10,267 6.85% 1,042,205 14,048 4.90% 962,224
14,157 4.75% 839,239
Service Organizations...................Organizations 25,653 6.85% 46,787 11,812 4.90% 66,463
11,873 4.75% 30,720
Associate Members.......................Members 7,651 6.85% 13,524 3,084 4.90% 16,201
1,856 4.75% 10,129
Telecommunication Organizations.........Organizations 34,637 7.60% 198,636 31,176 5.65% 114,172
21,370 5.50% 59,164
----------- -------------- ----------- --------------
Total short-term loans..............loans 524,170 6.90% 3,333,372 336,493 4.97% 3,102,395 201,197 4.83% 2,674,340
----------- -------------- ----------- --------------
Nonperforming loans (F):
Distribution Systems....................Systems 1,830 7.21% 0 1,933 8.27% -- 11,164 10.20% 23,5000
Power Supply Systems....................Systems 25,811 6.57% 0 27,948 4.75% -- 29,584 4.75% --0
Associate Members.......................Members 0 0 0 12,961 9.00% -- 12,963 9.00% --0
Telecommunication Organizations.........Organizations 0 0 0 2,098 6.13% -- 2,117 9.00% --
----------- -------------- ----------- --------------0
Total nonperforming loans...........loans 27,641 6.61% 0 44,940 6.19% -- 55,828 6.99% 23,500
----------- -------------- ----------- --------------0
63
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS - (Continued)
1995 1994
Weighted Weighted
(Dollar Amounts In Thousands) Average Average
Loans Interest Unadvanced Loans Interest Unadvanced
Outstanding Rates Commitments(A) Outstanding Rates Commitments(A)
Restructured loans (G):
Distribution Systems....................Systems $ 2,654 18.37% $ 0 $ 2,667 18.37% $ 3,000 -- -- --
Power Supply Systems....................Systems 180,521 9.01% 20,000 160,873 8.32% 50,000
149,685 7.86% 26,500
Service Organizations...................Organizations 1,803 6.50% 0 1,833 4.62% -- 2,000 4.63% --0
Associate Members....................... -- -- -- 2,666 4.46% --Members 0 0 0 0 0 0
Telecommunication Organizations......... -- -- -- 18,592 4.77% --
----------- -------------- ----------- --------------Organizations 0 0 0 0 0 0
Total restructured loans............loans 184,978 9.12% 20,000 165,373 8.44% 53,000
172,943 7.43% 26,500
----------- -------------- ----------- --------------
Total loans.........................loans 6,952,720 7.01% 5,037,782 6,109,218 5.87% 5,187,530 5,285,042 6.10% 4,306,975
----------- -------------- ----------- --------------
Less: Allowance for Loan and Guarantee Losses....................................Losses 205,596 0 188,196 -- 172,571 --
----------- -------------- ----------- --------------0
Net loans...........................loans $6,747,124 $5,037,782 $5,921,022 $5,187,530 $5,112,471 $4,306,975
=========== ============== =========== ==============
- - ---------------
(A) Unadvanced commitments include loans approved by CFC for which loan
contracts have not yet been executed and for which loan contracts have been
executed, but funds have not been advanced. CFC may
F-11
63
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) require additional
information to assure itself that all conditions for advance of funds have
been fully met and that there has been no material change in the member's
condition as represented in the documents supplied to CFC. Since commitments
may expire without being fully drawn upon, the total amounts reported as
commitments do not necessarily represent future cash requirements. Collateral
and security requirements for lending on commitments are identical to those
for advanced loans. 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 the advance
on the amount of the advance.
(B) Generally, long-term fixed rate secured loans provide for a fixed
interest rate for terms of one to 30 years. Upon expiration of the term,
the borrower may select another fixed rate term of one to 30 years (but
not beyond maturity of the loan) or a variable rate. The borrower may
select either option or may repay to CFC the principal then outstanding
together with interest due thereon and other sums, if required. Included
in long-term fixed rate secured loans are $30.4 million of unsecured
loans at May 31, 1995.
(C) CFC had loans outstanding to National Cooperative Services Corporation
("NCSC") in each of the periods shown. Long-term fixed rate loans
outstanding to NCSC as of May 31, 1995 and 1994, and 1993, were $47.8$48.5 million and
$49.0$47.8 million, respectively. In addition, as of May 31, 1995 and 1994,
CFC had unadvanced long-term fixed rate and variable rate loan commitments to NCSC in the amount of $5.0$12.3
million and $9.7$14.7 million, respectively.
(D) Included in the long-term variable rate secured loans are $41.4 million and
$3.5 million and
$2.5 million inof unsecured loans to one borrower at May 31, 19941995 and 1993.1994.
(E) All short-term loans are unsecured, except for $30.9 million and $18.2
million and $31.6
million inof loans outstanding at May 31, 19941995 and 19931994 that are secured.
(F) The rates on nonperforming loans are the weighted average of the stated
rates on such loans as of the dates shown and do not necessarily relate
to the interest recognized by CFC from such loans.
(G) The rates on restructured loans are the weighted average of the effective
rates (based on present values of scheduled future cash flows) as of
the dates shown and do not necessarily relate to the interest recognized
by CFC from such loans.
F-12
64
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS - (Continued)
Loans outstanding, by state or U.S. territory, are summarized below:
MAY(Dollar Amounts In Thousands)
May 31, -----------------------
STATEMay 31,
State 1995 1994 1993
- - ---------------------- ---------- ----------
(DOLLAR AMOUNTS IN
THOUSANDS)State 1995 1994
Alabama............... $ 115,355 $ 78,761
Alaska................ 73,195 66,239
Arizona............... 62,188 46,639
Arkansas.............. 204,666 174,119
California............ 17,906 5,273
Colorado.............. 249,381 244,333
Delaware.............. 17,492 17,779
District of
Columbia............ 63,843 81,532
Florida............... 317,421 268,158
Georgia............... 415,393 387,936
Idaho................. 37,202 34,499
Illinois.............. 555,531 443,792
Indiana............... 101,190 96,110
Iowa.................. 129,454 123,734
Kansas................ 215,717 201,875
Kentucky.............. 157,051 152,133
Louisiana............. 124,877 128,051
Maine................. 2,914 20,812
Maryland.............. 65,779 67,662
Michigan.............. 55,969 49,853
Minnesota............. 180,370 164,707
Mississippi........... 186,869 170,707
Missouri.............. 219,121 213,704
Montana............... 136,812 29,576
Nebraska.............. 21,096 13,588
MAY 31,
-----------------------
STATE 1994 1993
- - ---------------------- ---------- ----------
(DOLLAR AMOUNTS IN
THOUSANDS)
Nevada................Alabama $136,143 $115,355 Nevada $ 7,495 $ 7,709
$ 6,019Alaska 110,753 73,195 New Hampshire.........Hampshire 31,576 8,787
7,903Arizona 79,590 62,188 New Jersey............Jersey 5,564 4,109
4,195Arkansas 226,798 204,666 New Mexico............Mexico 109,505 103,055
39,468California 17,358 17,906 New York..............York 10,843 13,202
10,090Colorado 286,242 249,381 North Carolina........Carolina 241,349 267,782
201,467Delaware 17,201 17,492 North Dakota..........Dakota 13,800 10,916
9,617
Ohio..................District of Columbia 92,656 63,843 Ohio 87,321 68,895
58,883
Oklahoma..............Florida 320,177 317,421 Oklahoma 251,804 220,346
179,766
Oregon................Georgia 515,767 415,393 Oregon 142,404 113,600
107,012
Pennsylvania..........Idaho 41,856 37,202 Pennsylvania 83,100 80,272
76,921Illinois 470,160 555,531 South Carolina........Carolina 273,099 251,520
156,786Indiana 109,180 101,190 South Dakota..........Dakota 42,831 41,072
38,285
Tennessee.............Iowa 143,016 129,454 Tennessee 58,730 55,681
60,858
Texas.................Kansas 240,366 215,717 Texas 727,320 580,375
536,566
Utah..................Kentucky 171,736 157,051 Utah 149,752 131,285
99,217
Vermont...............Louisiana 125,088 124,877 Vermont 66,724 11,674
11,030Maine 65,540 2,914 Virgin Islands........Islands 52,081 56,114
63,074
Virginia..............Maryland 77,588 65,779 Virginia 170,400 174,607
170,830
Washington............Michigan 74,255 55,969 Washington 77,320 76,991
72,222Minnesota 230,301 180,370 West Virginia.........Virginia 1,038 1,051
718
Wisconsin.............Mississippi 183,239 186,869 Wisconsin 92,354 79,811
70,827
Wyoming...............Missouri 248,846 219,121 Wyoming 102,569 23,572
21,716
---------- ----------
Total............Montana 146,572 136,812 Total $6,952,720 $6,109,218
$5,285,042
========= =========Nebraska 23,313 21,096
Weighted average interest rates earned (recognized in the case of
nonperforming and restructured loans) on all loans outstanding are summarized
below:
FOR THE YEAR ENDED MAYFor the year ended May 31,
-------------------------1995 1994 1993 1992
----- ----- -----
Long-term fixed rate.......................rate 8.63% 8.63% 9.15%
9.16%
Long-term variable rate....................rate 5.90% 4.08% 4.99%
6.09%
Telecommunication organizations............organizations 6.70% 5.58% 6.32% 7.26%
Refinancing loans guaranteed by REA........RUS 6.07% 4.01% 4.09%
5.97%
Intermediate-term..........................Intermediate-term 6.19% 4.41% 4.93%
6.03%
Short-term.................................Short-term 6.29% 4.38% 5.08%
6.18%
Associate members..........................members 5.40% 4.21% 4.74%
6.09%
Nonperforming..............................Nonperforming 1.56% 1.19% 1.26%
7.96%
Restructured...............................Restructured 1.92% 2.33% 1.92%
3.52%
All loans...................loans 6.72% 5.66% 6.54% 7.86%
F-13
65
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)- (Continued)
Long-term fixed rate loans outstanding at May 31, 19941995 which will be subject
to adjustment of their interest rates during the next five calendar years are
summarized as follows (due to principal repayments, amounts subject to
interest rate adjustment may be lower at the actual time of interest rate
adjustment):
WEIGHTED
AVERAGE
INTEREST AMOUNTS
RATE OUTSTANDING
-------- -----------
(DOLLAR AMOUNTS IN
THOUSANDS)Weighted
(Dollar Amounts In Thousands) Average
Interest Amounts
Rate Outstanding
1995............................................... 7.99% $ 141,814
1996............................................... 8.25% 151,991
1997............................................... 9.13% 146,655
1998............................................... 8.22% 161,008
1999...............................................1996 7.96% $134,531
1997 9.07% 140,178
1998 8.19% 165,408
1999 7.54% 303,667
-----------
$ 905,135
===========306,040
2000 6.74% 133,833
$879,990
During the first quarter of calendar year 1994,1995, long-term fixed rate loans
totaling $52.9$26.2 million had their interest rates adjusted. These loans will
be eligible to readjust their interest rates again during the first quarter of
calendar year 19951996 to the lowest long-term fixed rate offered during 19941995 for
the term selected. At January 1 and May 31, 1994,1995, the standard long-term
fixed rates were 6.55%8.80% and 8.00%7.20%, respectively.
On most long-term secured loans, level quarterly payments are required with
respect to principal and interest in amounts sufficient to repay the loan
principal, generally over a period ending approximately 35 years from the date
of the secured promissory note. Fiscal year 1995 repayments of principal on
long-term loans outstanding are expected to be a relatively minor amount of
such outstanding loans.
CFC evaluates each borrower's creditworthiness on a case-by-case basis. It is
generally CFC's policy to require collateral for all long-term and some
intermediate-term loans. Such collateral usually consists of a first mortgage
lien on the borrower's total system, including plant and equipment, and a
pledge of future revenues. The loan and security documents also contain
various provisions with respect to the mortgaging of the borrower's property,
the maintenance of certain earnings and debt service coverage ratios,
maintenance of adequate insurance coverage and certain other restrictive
covenants.
Under common mortgages securing long-term CFC loans to Distribution System
members, REARUS has the sole right to act within 30 days or, if REARUS is not
legally entitled to act on behalf of all noteholders, CFC may exercise
remedies. Under common mortgages securing long-term CFC loans to, or
guarantee reimbursement obligations of, Power Supply members, REARUS retains
substantial control over the exercise of mortgage remedies.
As of May 31, 19941995 and 1993,1994, mortgage notes representing approximately $717.8$789.9
million and $1,301.7$717.8 million, respectively, of outstanding long-term loans to
members were pledged as collateral to secure CFC's Collateral Trust Bonds.
CFC has received no guarantee of its loans from REA;RUS; however, "Refinancing
loans guaranteed by REA"RUS" represents loans made by CFC and transferred to its
affiliate GFC to fund the prepayment of members' Federal Financing Bank debt,
effected through grantor trusts which each hold a note from the member, the
repayment of which has been guaranteed by REA.RUS. Each trust issues Trust
Certificates which represent an undivided interest in the trust assets. GFC,
as holder of Trust Certificates, is financing these loans from funds provided
by CFC at a variable rate until fixed rate funding is obtained through the
public markets.
CFC sets the variable interest rates monthly on outstanding short-andshort- and
intermediate-term loans. On notification to borrowers, CFC may adjust the
interest rate semimonthly. Under CFC policy, the maximum interest rate which
may be charged on short-term loans is the prevailing bank prime rate plus 1%
per annum; F-14on intermediate-
66
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
on intermediate-term- (Contined)
term loans, the prevailing bank prime rate plus 1 1/2%1.5% per annum; and on RTFC
short-term loans, the prevailing bank prime rate plus 3% per annum.
At May 31, 1995, 1994 1993 and 1992,1993, nonperforming loans in the amount of $27.6
million, $44.9 million $55.8 million and $17.0$55.8 million, respectively, were on a nonaccrual
basis with respect to recognition of interest income. The effect of not
accruing interest on nonperforming loans was a decrease in interest income of
$1.5$2.1 million, $1.1$1.5 million and $1.1 million for the years ended May 31, 1995,
1994 1993
and 1992,1993, respectively. Income recognized on these loans totaled $0.5$0.7
million, $0.5 million and $20.9$0.5 million, respectively.
At May 31, 1995, 1994 1993 and 1992,1993, the total amount of restructured debt was
$185.0 million, $165.4 million $172.9 million and $145.6$172.9 million, respectively. CFC elected
to apply all principal and interest payments received against principal
outstanding amounts on restructured debt of $131.1 million, $111.5 million $100.3 million and $81.2$100.3
million, respectively. The interest income that would have been recorded
under the original terms of the debt, assuming the debt had been outstanding
for the period, was $12.5 million, $8.4 million $8.8 million and $10.5$8.8 million, for the
years ended May 31, 1995, 1994 1993 and 1992,1993, respectively. The interest income
actually recorded for restructured debt was $3.5 million, $4.0 million $2.9 million and
$5.6$2.9 million, respectively. At May 31, 19941995 and 1993,1994, CFC had committed to
lend $53.0$20.0 million and $26.5$53.0 million, respectively, to borrowers performing
under restructured terms.
(3) MEMBERS' SUBORDINATED CERTIFICATESMembers' Subordinated Certificates
Membership Subscription Certificates
To join CFC and to establish eligibility to borrow, CFC members (other than
associate members and service organizations) are required to execute
agreements to subscribe to certain Subordinated Certificates. Such
certificates are interest-bearing, unsecured, subordinated debt of CFC. CFC
is authorized to issue subscription certificates without limitation as to the
total principal amount.
Generally, Membership Subscription Certificates mature in the years 2070
through 2090 and bear interest at 3% or 5% per annum.
New members joining CFC are required to purchase Membership Subscription
Certificates in an amount equal to 5% of each loan advance up to a maximum
amount based on their operating results. The maturity dates and interest
rates payable on such Certificates vary in accordance with applicable CFC
policy.
In certain cases, the Board of Directors has approved alternative deferred
payment arrangements for purchase of subscription certificates. These
deferred payments are evidenced by noninterest-bearing, unsecured notes from
the member and are shown as receivables.
Loan and Guarantee Certificates
Members obtaining long-term loans, certain intermediate-term loans or
guarantees from CFC or RTFC are generally required to purchase additional
Subordinated Certificates with each such loan or guarantee. These
certificates are unsecured, subordinated debt of CFC and RTFC.
Certificates currently purchased in conjunction with loans are noninterest-bearingnoninterest-
bearing and are generally repaid periodically over the life of the loan in
relation to the loan principal balance outstanding. Such certificate purchase
requirements, if any, range from 1% to 12% of the loan amount depending on the
membership classification of the borrower and the borrower's leverage ratio,
including the new loan, with CFC, for utility systems.
The maturity dates and the interest rates payable on certificates purchased in
conjunction with CFC's guarantee program vary in accordance with applicable
CFC policy. In addition, members may also be required to purchase
noninterest-bearing Subordinated Certificates in connection with CFC's
guarantee of long-term tax-exempt bonds (see Note 8). These certificates have
varying maturities but none is greater than the longest F-15
67
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
maturity of the
guaranteed obligation. Proceeds from the sale of such certificates are
pledged by CFC to the debt service reserve 67
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS - (Continued)
fund established in connection with the bond issue, and any earnings from the
investments of the fund inure solely to the benefit of the members for whose
benefit the bonds are issued.
Information with respect to Members' Subordinated Certificates at May 31, is
as follows:
(Dollar Amounts In Thousands) 1995 1994 1993
---------- ----------
Membership Subscription Certificates:
Number of subscribing members..................................members 903 899 894
(DOLLAR AMOUNTS IN
THOUSANDS)
Issued and outstanding:
3% and 5% certificates maturing 2020 through 2090.........209 $ 630,249 $ 628,583
$ 627,067
Subscribed and unissued........................................unissued 6,880 11,937 13,453
---------- ----------
Total Membership Subscription Certificates...........Certificates 637,129 640,520 640,520
---------- ----------
Loan and Guarantee Certificates:
Issued and outstanding:
3% certificates maturing through 2040.....................2040 140,911 141,481
146,197
8.33%5.74% to 13.70% certificates maturing through 2018........2018 137,905 143,468 140,871
Noninterest-bearing certificates maturing through 2027....2029 301,354 279,978 268,998
Subscribed and unissued........................................unissued 17,416 17,411 18,961
---------- ----------
Total Loan and Guarantee Certificates................Certificates 597,586 582,338 575,027
---------- ----------
Total Members' Subordinated Certificates.............Certificates $1,234,715 $1,222,858 $1,215,547
========= =========
CFC estimates the amount of Subscription and Loan and Guarantee Certificates
that will be repaid during the next five fiscal years will total approximately
2%2.65% of certificates outstanding. The weighted average interest rate paid on
all subordinated certificates was 4.46%4.36%, 4.58%4.46% and 4.17%4.58% as of May 31, 1995,
1994 1993 and 1992,1993, respectively. These rates do not include $114.1 million,
$107.1 million $116.5 million and $128.0$116.5 million of debt service reserve certificates and
$24.3 million, $29.3 million $32.4 million and $36.2$32.4 million of subscribed but unissued
subordinated certificates at May 31, 1995, 1994 and 1993, and 1992, respectively.
F-16
68
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)- (Continue)
(4) NOTES PAYABLE AND CREDIT ARRANGEMENTSNotes Payable and Credit Arrangements
Notes payable due within one year as of May 31, and weighted average interest
rates thereon, are summarized as follows:
1995 1994
1993
----------------------- -----------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
AMOUNTS INTEREST AMOUNTS INTEREST
OUTSTANDING RATES OUTSTANDING RATES
----------- -------- ----------- --------
(DOLLAR AMOUNTS IN THOUSANDS)Weighted Weighted
Average Average
Amounts Interest Amounts Interest
(Dollar Amounts In Thousands) Outstanding Rates Outstanding Rates
Commercial paper, sold through dealer, net of
discounts of $23,981 and $3,320, and $2,295, respectively....................respectively $2,783,018 6.13% $ 2,367,763 4.28% $ 1,021,215 3.17%
Commercial paper sold by CFC directly to members, at par...................................................par 1,049,474 6.06% 999,549 4.13% 1,114,797 3.11%
Commercial paper sold by CFC directly to nonmembers,
at par................................................par 60,078 6.06% 61,663 4.01%
62,612 3.14%
----------- -----------3,892,570 6.11% 3,428,975 4.23%
2,198,624 3.14%
Bank bid notes..........................................notes 350,000 6.11% 209,000 4.30%
335,000 3.17%
----------- -----------4,242,570 6.11% 3,637,975 4.23% 2,533,624 3.14%
Notes payable supported by revolving credit agreements,
classified as long-term debt (see Note 5)............. (2,430,000) 6.11% (2,030,000) 4.23%
(2,030,000) 3.14%
----------- -----------$1,812,570 6.11% $ 1,607,975 4.23% $ 503,624 3.14%
============ ============
Other information with regard to notes payable due within one year at May 31,
is as follows:
(Dollar Amounts In Thousands) 1995 1994 1993 1992
-------------- -------------- --------------
(DOLLAR AMOUNTS IN THOUSANDS)
Original maturity range of notes outstanding at
year-end........................................year-end 1 to 261 days 1 to 269 days 1 to 232 days
1 to 222 days
Weighted average original maturity of notes outstanding
at year-end.........................year-end 65 days 36 days 46 days 44 days
Average amount outstanding during the year........year $3,895,274 $2,954,783 $2,279,304 $2,125,192
Maximum amount outstanding at any month-end during
the year........................................year $4,242,570 $3,637,975 $2,533,624 $2,250,162
Weighted average interest rate paid for the year,
without effect of compensating balances and
commitment fees.................................fees 5.44% 3.48% 3.36% 5.01%
Weighted average effective interest rate paid for the
year, including effect of compensating balances
and commitment fees....................fees 5.59% 3.67% 3.61% 5.22%
CFC issues short-term bid notes which are unsecured obligations of CFC and do
not require back-up bank lines for liquidity purposes. Bid note facilities
are uncommitted lines of credit for which CFC does not pay a fee. The
commitments are generally subject to termination at the discretion of the
individual banks.
69
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS - (Continued)
As of May 31, 1994,1995, CFC had two revolving credit agreements totaling $2,900.0$4,050.0
million with 5255 banks, including Morgan Guaranty Trust Company of New York as
Arranger, Administrative Agent and ArrangerCo-Syndication Agent and the Bank of Nova
Scotia as ManagingCo-Syndication Agent. These credit facilities were arranged
principally to provide liquidity support for CFC's outstanding commercial
paper and the adjustable or floating/fixed rate bonds which CFC has guaranteed
and agreed to purchase for the benefit of its members (see Note 8).
Under the respective revolving credit agreements, CFC can borrow up to
$2,030.0$2,430.0 million until June 3, 1996February 28, 2000 (the "three-year"five-year facility"), and $870.0an
additional $1,620.0 million until May 26, 1995February 27, 1996 (the "364-day facility").
Any
F-17
69
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) amounts outstanding will be due on those dates. In connection with the
three-yearfive-year facility, CFC pays a per annum facility/commitment fee of .225.125 of
1%. The per annum facility fee for the 364-day facility is .15.10 of 1%. If
CFC's short-term ratings decline, these fees may be increased by no more than
.2125.1125 of 1%. Borrowings under both agreements will be at one or more rates as
defined in the agreements, as selected by CFC.
The revolving credit agreements require CFC among other things to maintain
Members' Equity and Members' Subordinated Certificates of at least $1,334.4$1,345.0
million (increased each fiscal year by 90% of net margins not distributed to
members) and an average fixed charge coverage ratio over the six most recent
fiscal quarters of at least 1.025 and prohibits the retirement of patronage
capital unless CFC has achieved a fixed charge coverage ratio of 1.05 for the
preceding fiscal year. The credit agreements prohibit CFC from incurring
senior debt (including guarantees but excluding indebtedness incurred to fund
REARUS guaranteed loans) in an amount in excess of ten times the sum of Members'
Equity and subordinated debt and restrict, with certain exceptions, the
creation by CFC of liens on its assets and contain certain other conditions
to borrowing. The agreement also prohibits CFC from pledging collateral in
excess of 150% of the principal amount of Collateral Trust Bonds outstanding.
Provided that CFC is in compliance with these financial covenants (including
that CFC has no material contingent or other liability or material litigation
not disclosed by or reserved against in its most recent annual financial
statements) and is not in default, CFC may borrow under the agreements until
the termination date. As of May 31, 1994,1995, CFC was in compliance with all
covenants and conditions.
As of May 31, 1994,1995, there were no borrowings outstanding under the revolving
credit agreements. At May 31, 1994,1995, CFC classified $2,030.0$2,430.0 million of its
notes payable outstanding as long-term debt. CFC expects to maintain more
than $2,030.0$2,430.0 million of notes payable outstanding during the next 12 months.
If necessary, CFC can refinance such notes payable on a long-term basis by
borrowing under the three-yearfive-year facility, subject to the conditions therein.
In addition to the revolving credit facilities at May 31, 1994, CFC also
had $610.0 million in separately negotiated 364-day lines of credit, documented
by a uniform line of credit agreement for which a commitment fee of .10 of 1% is
paid. The line of credit agreement contains the same financial covenants as the
revolving credit agreements and may be terminated upon 30 days notice by either
party. After such notice the bank would not be obligated to lend.
F-18
70
NATIONAL RURAL UTILITIESUTILTIIES COOPERATIVE FINANCE CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)- (Continued)
(5) LONG-TERM DEBTLong-Term Debt
The following is a summary of long-term debt as of May 31:
(Dollar Amounts In Thousands)
1995 1994 1993
---------- ----------
(DOLLAR AMOUNTS IN
THOUSANDS)
Long-term debt:
Notes payable supported by revolving credit agreement
(see Note 4)............................................................. $2,430,000 $2,030,000 $2,030,000
---------- ----------
Medium-Term Notes, sold through dealer..........................dealer 206,975 238,225 255,925
Medium-Term Notes, sold directly to members.....................members 366,662 233,983
200,613
---------- ----------573,637 472,208 456,538
---------- ----------
Collateral Trust Bonds:
9 3/8%,Floating Rate, Series Q,1994A, due 1995................................. --1996 (1) 150,000 9 5/8%, Series R, due 1996................................. -- 100,000
9.85%, Series S, due 1996.................................. -- 100,000
9 1/2%0
9.5%, Series T, due 1997.................................1997 (2) 150,000 150,000
8 1/2%8.5%, Series U, due 1998.................................1998 (2) 150,000 150,000
7.40%, Series A, due 2007..................................2007 (2) 0 2,819 6,319
Floating Rate, Series E-2, due 2010........................2010 (2) 2,189 2,253 2,279
9%, Series O, due 2016.....................................2016 (2) 83,200 87,400 91,600
9%, Series V, due 2021.....................................2021 (2) 150,000 150,000
---------- ----------685,389 542,472 900,198
Less: Collateral Trust Bonds held in treasury...................treasury 1,111 200 1,500
Unamortized bond discount.................................discount 2,233 2,412 2,952
---------- ----------
Total Collateral Trust Bonds..........................Bonds 682,045 539,860 895,746
---------- ----------
Total long-term debt..................................debt $3,685,682 $3,042,068
$3,382,284
========= =========(1) Issued under the 1994 indenture.
(2) Issued under the 1972 indenture.
CFC redeemed Series Q Collateral Trust Bonds on June 16, 1994, Series R
Collateral Trust Bonds on February 2, 1994, and Series S Collateral Trust Bonds
on April 18, 1994, all at par.
The weighted average interest rate on Medium-Term Notes and Collateral Trust
Bonds was 8.06%7.90%, 8.56%8.06% and 8.90%8.56% as of May 31, 1995, 1994 1993 and 1992.1993. These
rates do not include notes payable supported by the revolving credit agreement.
The principal amount of Medium-Term Notes and Collateral Trust Bonds maturing
(including any sinking fund requirements) in each of the five fiscal years
following May 31, 1994,1995, is as follows:
(DOLLAR AMOUNTS IN THOUSANDS)
1995.......................... $200,848
1996.......................... 150,604
1997.......................... 273,500
1998.......................... 122,600
1999.......................... 12,300
(Dollar Amounts In Thousands)
1996 $262,651
1997 392,650
1998 179,635
1999 15,845
2000 14,681
Under the 1972 Indenture for Collateral Trust Bonds, CFC is required to
maintain funds in a debt service investment account equivalent to principal
and interest payments due on the bonds over the next twelve12 months. At May 31,
19941995 and 1993,1994, CFC had $33.7$32.7 million and $45.6$33.7 million of such funds invested
in bank certificates of deposit and marketable securities, respectively.
F-19
71
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)- (Continued)
The outstanding Collateral Trust Bonds are secured by the pledge of mortgage
notes taken by CFC in connection with long-term secured loans made to those
members fulfilling specified criteria as set forth in the indenture. Medium-TermMedium-
Term Notes are unsecured obligations of CFC.
As of May 31, 1994The following table lists the notional principal amounts and 1993,the weighted
average interest rates paid by CFC hadunder interest rate exchange agreements as
follows:at
May 31, 1995 and 1994:
AGGREGATE AMOUNT
INTEREST ---------------------------
MATURITY DATE RATE(Dollar Amounts in Thousands)
Maturity Interest Rate Paid Notional Principal Amount
Date 1995 1994 1993
------------------------------------------------- ----- -------- --------
(DOLLAR AMOUNTS IN
THOUSANDS)1995 1994
August 1996......................................1996 (1) 8.40% 8.40% $ 30,000 $ 30,000
September 1996 (2) 5.90% 0 150,000 0
February 1997....................................1997 (1) 9.34% 100,000 100,000
-------- --------
$130,000 $130,000
======== ========
9.34% 35,000 35,000
February 1997 (1) 9.33% 9.33% 40,000 40,000
February 1997 (1) 9.36% 9.36% 25,000 25,000
February 1988 (2) 5.57% 0 50,000 0
Total $330,000 $ 130,000
(1) Under these agreements, CFC pays a fixed rate of interest and receives
interest based on a variable rate.
(2 Under these agreements, CFC pays a variable rate of interest and receives
a variable rate of interest.
CFC's objective in using interest rate exchange agreements in which it pays a
fixed rate of interest and receives a variable rate of interest is to fix the
interest rate on a portion of its commercial paper. CFC then uses commercial
paper, in an amount equal to the notional principal value of the interest rate
exchange agreements, to fund a portion of its long-term fixed rate loan
portfolio. During fiscal year 1995, CFC received a weighted average rate of
5.58%, 5.55%, 5.56% and 5.56% on the interest rate exchange agreements
maturing August 1996, February 1997, February 1997 and February 1997,
respectively. 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 floatingLIBOR rate index, while CFC sets its variable rate loan
interest rates based on a commercial paper rate. During fiscal 1995, CFC
received a weighted average rate of 5.82% and 6.31% on the interest rate
exchange agreements maturing in September 1996 and February 1998, respectively.
The net result of whichdifference between the rate paid by CFC and the rate received is
included in the cost of funds.
CFC is exposed to interest rate risk to the extent of
nonperformance by the other parties to the agreements.
CFC enters into interest rate swaps in managing its interest rate risk. In
these swaps, CFC agrees with other parties to exchange, at specified intervals,
the difference between fixed-and floating-interest amounts calculated on an
agreed-upon notional principal amount. CFC uses interest rate swap agreements to
hedge certain long-term fixed-rate interest-earning assets that have been funded
by shorter-term variable interest-bearing liabilities. Interest rate swaps in
which CFC pays the fixed and receives the floating rate are used to reduce the
impact of market interest rate fluctuations on CFC's net margins.
CFC is be exposed on these interest rate swap agreements to interest rate risk if
the counterparty to the interest rate swap agreement does not perform to the
agreement's terms. CFC does have aCFC's policy intendedis to limit counterparty
credit risk by maintainingenter swap agreements only with
financial institutions with at least a AA long-term credit rating.
72
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS - (Continued)
(6) EMPLOYEE BENEFITSEmployee Benefits
CFC is a participant in the National Rural Electric Cooperative Association
("NRECA") Retirement and Security Program. This program is available to all
qualified CFC employees. Under the program, participating employees are
entitled to receive, under a 50% joint and surviving spouse annuity, 1.90% of
the average of their five highest base salaries during their last ten years of
employment, multiplied by the number of years of participation in the program.
CFC funds
pension costs accrued on a monthly basis. A moratorium on contributions hashad been in effect since July 1, 1987, when the
plan reached the full funding limitation. In November 1994, the moratorium
on funding was lifted. CFC contributed a total of $549,000 from November
1994 through April 1995, at which time the funding moratorium was again placed
in effect. Funding requirements are charged to general and administrative
expenses as billed on a monthly basis. This is a multi-employer plan,
available to all member cooperatives of NRECA, and therefore, the projected
benefit obligation and plan assets are not determined or allocated separately
by individual employer.
The Budget Reconciliation Act of 1993 has set a limit of $150,000 on the
1994
compensation to be used in the calculation of pension benefits. In order to
restore potential lost benefits, CFC has set up a Pension Restoration Plan.
Under the plan, the amount that NRECA invoices CFC will continue to be based
on the full compensation paid to each employee. Upon the retirement of a
covered employee, NRECA will calculate the retirement and security benefit to
be paid with consideration of the compensation limits and will pay the maximum
benefit thereunder. NRECA will also calculate the retirement and security
benefit that would have been available without consideration of the
compensation limits and CFC will pay the difference. NRECA will then give CFC
a credit against future retirement and security contribution liabilities in
the amount paid by CFC to the covered employee.
CFC will pay such additional benefits to the covered employee through a
Severance Pay Plan and a Deferred Pay Restoration Plan. Under the Severance
Pay Plan, the employee is paid an amount equal to the lost pension benefits
but not to exceed twice the employee's annual compensation for the prior year.
The F-20
72
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
benefit must be paid within 24 months of termination of employment. To
the extent that the Severance Pay Plan cannot pay all of the lost pension
benefits, the remainder will be paid under a Deferred Compensation Plan, which
will be paid out in a lump sum or in installments of up to 60 months.
CFC recognizes in current year margins any expected payouts for post
retirement benefits (other than pensions) as a result of current service.
Postretirement benefits include, but are not limited to, health and welfare
benefits provided after retirement. While CFC allows retired employees to
participate in its medical and life insurance plans, the retirees must do so
at their own expense. Any liability which may be incurred by allowing retired
employees to remain on CFC's medical and life insurance plans is not material
to CFC's financial condition, results of operations or cashflows.
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. Employee
contributions for calendar year 1995 are tax deductible up to $9,240, the
limit set by IRS regulations. Employees may contribute additional amounts to
the program on an after-tax basis subject to the limitations established b
y section 415 of the IRC. The Company will contribute an amount equal to 2%
of an employee's salary each year for all employees participating in the
program. During the year ended May 31, 1995, the Company contributed a total
of $140,900 under the program.
(7) RETIREMENT OF PATRONAGE CAPITALRetirement of Patronage Capital
Patronage capital in the amount of $30.1$35.5 million was retired during fiscal
year 1994.1995. This amount consists of $28.0$30.9 million retired byto CFC $1.2Members,
excluding RTFC, $2.3 million retired byto RTFC and $0.9Members, $1.8 million retired
to GFC Members and $0.5 million retired as part of the repayment of loans by
GFC.
In accordance with the CFC-only policy of retiring patronage capital, ittwo nonperforming borrowers.
It is anticipated that CFC will retire patronage capital representing
one-sixth of the fiscal years 1988, 1989 and 1990 allocations along with one-halfand 70% of the
fiscal year 19941995 allocation will be retired in August 1994.1995. Management anticipates that
50%70% of RTFC's margins for fiscal year 19941995 will be retired in January 1995,1996,
and that 100% of GFC's margins for fiscal year 19941995 will be retired in the
second quarter of fiscal year 1995.1996. Future retirements of patronage capital
will be made as determined by the Companies'companies' respective Boards of Directors
with due regard for their individual financial conditions.
73
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS - (Continued)
During fiscal year 1995, CFC changed its patronage capital retirement policy
to increase the amount of the current year allocations to be retired from 50%
to 70%.
(8) GUARANTEESGuarantees
As of May 31, 19941995 and 1993,1994, CFC had outstanding guarantees of the following
contractual obligations of its members (see Note 1(e) for a description of
CFC's allowance for loan and guarantee losses and Note 3 for a discussion of
requirements to purchase Members' Subordinated Certificates in connection with
these guarantees):
(Dollar Amounts In Thousands)
1995 1994 1993
---------- ----------
(DOLLAR AMOUNTS IN
THOUSANDS)
Long-term tax exempt bonds (A)................................... $1,496,930 $1,494,200 $1,576,230
Debt portions of leveraged lease transactions (B)................ 568,662 646,472 700,841
Indemnifications of tax benefit transfers (C).................... 389,755 414,512 436,860
Other guarantees (D)............................................. 119,575 100,643
99,800
---------- ----------
Total.............................................Total $2,574,922 $2,655,827 $2,813,731
========= =========
- - ---------------
(A) CFC has unconditionally guaranteed to the holders or to trustees for the
benefit of holders of these bonds the full principal, premium, if any,
and interest on each bond when due. In addition, CFC has agreed to make
up, at certain times, deficiencies in the debt service reserve funds for
certain of these issues of bonds. In the event of a default by a system
for nonpayment of debt service, CFC is obligated to pay any required
amounts under its guarantee, which will prevent the acceleration of the
bond issue. The system is required to repay, on demand, any amount
advanced by CFC pursuant to its guarantee. This repayment obligation is
secured by a common mortgage with REARUS on all of the system's assets, but
CFC may not exercise remedies thereunder for up to two years. However,
if the debt is accelerated because of a determination that the interest
thereon is not tax-exempt, the system's obligation to reimburse CFC for
any guarantee payments will be treated as a long-term loan.
F-21
73
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Of the amounts shown, $1,214.6$1,200.1 million and $1,120.8$ 1,214.6 million as of May 31,
19941995 and 1993,1994, respectively, are adjustable or floating/fixed rate bonds.
The floating interest rate on such bonds may be converted to a fixed rate
as specified in the indenture for each bond offering. During the variable
rate period (including at the time of conversion to a fixed rate), CFC has
unconditionally agreed to purchase bonds tendered or called for redemption
if such bonds have not previously been sold to other purchasers by the
remarketing agents.
(B) CFC has guaranteed debt issued by NCSC in connection with leveraged lease
transactions. The amounts shown represent loans from NCSC to a trust for
the benefit of an industrial or financial company for the purchase of a
power plant or utility equipment which was subsequently leased to a CFC
member. The loans are secured by the property leased and the owner's
rights as lessor. NCSC borrowed the funds for these loans either under a
CFC guarantee or directly from CFC.
(C) CFC has unconditionally guaranteed to lessors certain indemnity payments
which may be required to be made by the lessees in connection with tax
benefit transfers. The amount shown represent CFC's maximum potential
liability at May 31, 19941995 and 1993.1994. However, the amounts of such
guarantees vary over the lives of the leases. As of May 31, 1994 and 1993, the maximum
amount of the guarantees when taken individually totaled $414.6 million and
$437.0 million, respectively. A member's obligation to
reimburse CFC for any guarantee payments would be treated as a long-term
loan, secured pari passu with the REARUS 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.
74
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS - (Continued)
(D) At May 31, 19941995 and 1993,1994, CFC had unconditionally guaranteed commercial
paper issued by NCSC in the amount of $34.8$34.9 million and $35.5$ 34.8
million, respectively.
Guarantees outstanding, by state, are summarized as follows:
MAY(Dollar Amounts In Thousands)
May 31, -----------------------
STATEMay 31,
State 1995 1994 1993
- - ---------------------- ---------- ----------State 1995 1994
(DOLLAR AMOUNTS IN
THOUSANDS)
Alabama............... $ 77,320 $ 81,165
Arizona............... 31,660 33,080
Arkansas.............. 268,425 309,784
Colorado.............. 115,299 115,300
Florida............... 395,457 439,130
Indiana............... 133,300 157,465
Iowa.................. 13,505 14,550
Kansas................ 43,208 43,889
Kentucky.............. 187,400 178,265
Maryland.............. 34,830 35,500
Minnesota............. 175,946 173,651
Mississippi........... 76,275 78,365
Missouri.............. 364,350 378,837
MAY 31,
-----------------------
STATE 1994 1993
- - ---------------------- ---------- ----------
(DOLLAR AMOUNTS IN
THOUSANDS)
Nebraska..............Alabama $ 74,605 $ 77,320 Nebraska $ 3,855 $ 4,765
$ 5,030Arizona 61,360 31,660 North Carolina........Carolina 122,350 124,450
124,450
Oklahoma..............Arkansas 262,574 268,425 Oklahoma 70,208 76,906
83,400
Oregon................Colorado 115,193 115,299 Oregon 5,180 5,280
5,365
Pennsylvania..........Florida 328,458 395,457 Pennsylvania 15,426 16,270
17,113Indiana 131,904 133,300 South Carolina........Carolina 48,265 54,155
54,300
Texas.................Iowa 12,775 13,505 Texas 125,623 106,502
104,370
Utah..................Kansas 42,528 43,208 Utah 322,840 336,584
366,317
Virginia..............Kentucky 183,300 187,400 Virginia 4,550 4,650
4,700
Wisconsin.............Maryland 34,898 34,830 Wisconsin 8,850 9,290
9,705
---------- ----------
Total............Minnesota 172,768 175,946 Total $2,574,922 $2,655,827
$2,813,731
========= =========Mississippi 74,135 76,275
Missouri 353,277 364,350
CFC uses the same credit policies and monitoring procedures in providing
guarantees as it does for loans and commitments.
F-22
74
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(9) FAIR VALUE OF FINANCIAL INSTRUMENTSFair Value of Financial Instruments
The following disclosure of the estimated fair value of financial instruments
is made in accordance with FASB Statement of Financial Accounting
Standards No. 107, "Disclosure about Fair
Value of Financial Instruments." Whenever possible, the estimated fair value
amounts have been determined using quoted market information as of May 31,
1994,1995, along with other valuation methodologies which are summarized below.
However, the estimated fair value information presented is not necessarily
indicative of amounts CFC could realize currently in a market sale as such
amounts have not been revalued since year end. Therefore, current estimates
of fair value may differ significantly from the amounts presented. With the
exception of redeeming Collateral Trust Bonds under early redemption
provisions and allowing borrowers to prepay their loans, CFC has held all
financial instruments to maturity. Below is a summary of significant
methodologies used in estimating fair value amounts and a schedule of fair
values at May 31, 1994.1995.
Cash and Cash Equivalents
Includes cash and marketable securities with remaining maturities of less than
90 days, which are valued at cost.
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 estimatedvalued at the carrying value which is a reasonable estimate of fair
value. 75
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS - (Continued)
Loans to Members
Fair values are estimated by discounting the future cash flows using the
current rates at which similar loans would be made to borrowers with similar
credit ratings and for the same remaining maturities. Loans with different
risk characteristics, specifically nonperforming and restructured loans, are
valued using a discount rate commensurate with the risk involved. Loans with
original interest rate repricing maturities of less than or equal to 90 days
are valued at cost which approximates fair value.
Debt Service Reserve Funds
Fair value of debt service reserve funds is estimated at cost as all gains and
losses on the underlying securities inure directly to the benefit or detriment
of the CFC member and not to CFC.
Notes Payable
Notes payable consist of commercial paper and bank bid notes. The fair value
of commercial paper and bid notes with maturities greater than 90 days is
estimated based on quoted market rates with similar maturities for commercial
paper and on bid prices from the various banking institutions for bid notes.
The fair value of commercial paper and bank bid notes with maturities less
than or equal to 90 days is estimatedare valued at carrying value which is a reasonable
estimate of fair value.
Long-Term Debt
Long-term debt consists of Collateral Trust Bonds and Medium-Term Notes. The
fair value of long-term debt is estimated based on published bid prices or
dealer quotes or is estimated using quoted market prices for similar
securities when no market quote is available.
Subordinated Certificates
As it is impracticable to develop a discount rate that measures fair value,
Subordinated Certificates have not been valued. Subordinated Certificates are
extended long-term obligations to CFC; many have maturities of 70 to 100
years. These certificates are issued to CFC's members as a condition of
membership or as a condition of obtaining loan funds or guarantees and are
non-transferable. As these certificates were issued not F-23
75
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
only for their future
payment stream but also as a condition to receiving future loan funds, there
is no ready market from which to obtain fair value rates.
Interest Rate ExchangedExchange Agreements
The fair value is estimated as the amount CFC would receive or pay to
terminate the agreement, taking into account the current market rate of
interest and the current creditworthiness of the exchange counterparties.
Commitments
The fair value is estimated as the carrying value, or zero. Extensions of
credit under these commitments, if exercised, would result in loans priced at
market rates.
76
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS - (Continued)
Guarantees
CFC charges guarantee fees based on the specifics of each individual
transaction. The demand for CFC guarantees has been small in the last few
years. In addition, there is no other company that provides guarantees to
rural electric utility companies withfrom which to obtain market fee information.
As a result, it is impracticable to supply fair value information related to
guarantee fees.
Carrying and fair values as of May 31, 19941995 and 19931994 are presented as follows:
(Dollar Amounts In Thousands) 1995 1994
1993
----------------------- -----------------------
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
---------- ---------- ---------- ----------
(DOLLAR AMOUNTS IN THOUSANDS)Carrying Fair Carrying Fair
Value Value Value Value
ASSETS:
Cash....................................Assets:
Cash and Cash Equivalents $ 56,309 $ 56,309 $ 22,168 $ 22,168
$ 55,450 $ 55,450
Debt Services Investments...............Service Investments 32,740 32,740 33,668 33,668 45,611 45,611
Loans to Members, net...................net 6,747,124 6,810,007 5,921,022 5,863,472 5,112,471 5,229,564
Debt Service Reserve Funds..............Funds 114,094 114,094 107,095 107,095
116,470 116,470
LIABILITIES AND MEMBERS' SUBORDINATED
CERTIFICATES:Liabilities:
Notes Payable (1)....................... 4,242,570 4,242,859 3,637,975 3,637,975
2,533,624 2,533,624
Long-Term Debt (1)...................... 1,255,682 1,355,463 1,012,068 1,065,200
1,352,284 1,561,550
Members' Subordinated Certificates......Certificates 1,234,715 1,234,715 1,222,858 1,222,858
1,215,547 1,215,547
OFF BALANCE SHEET INSTRUMENTS:Off-Balance Sheet Instruments:
Interest Rate Exchange Agreements.......Agreements 0 (11,196) 0 (9,189)
0 (14,622)
Commitments.............................Commitments 0 0 0 0
Guarantees..............................Guarantees 0 0 0 0
--------------------
(1) Prior to reclassification of notes payable supported by the revolving credit agreements.
(10) CONTINGENCIES
(A)Contingencies
(a) On May 23, 1985, Wabash Valley Power Association, Inc. ("WVPA") filed a
voluntary petition for reorganization under Chapter 11 of the U.S.
Bankruptcy Code in connection with the cancelled Marble Hill plant
construction.
On August 7, 1992,1991, the Bankruptcy Court confirmed WVPA's reorganization
plan pending approval of rates as contemplated in the plan.
Depending on
the final terms of a plan of reorganization, CFC could
F-24
76
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
be obligated to pay REA a pro-rata amount (estimated at 78%) of the debt
service payments plus interest made by WVPA on the $25 million in
tax-exempt bonds since the bankruptcy petition date.
On June 22, 1994, the U.S. District Court affirmed (over REA'sRUS's objection)
the Wabash plan inof reorganization. REA has until August 28, 1994, to appealRUS appealed the decision to the U.S.
Court of Appeals. Under the Wabash plan, CFC would realize an estimated
total loss of approximately $12 million ($8.6 million of which has been
written off to date), after the offset of subordinated capital term
certificates (without taking into account interest since the petition
date). CFC and RUS have agreed to distribute all proceeds from Wabash in
compliance with provisions under a shared mortgage. Upon resolution of
the bankruptcy, there will be a final accounting of proceeds received by
RUS and CFC since the petition date. At this time, CFC anticipates that
this final accounting will result in CFC making a net payment to RUS.
The estimated loss under the Wabash plan does not include the amount CFC
is obligated to pay to REA,RUS, representing REA'sRUS's share of the debt service
payments made by Wabash on the CFC guaranteed bonds, since the petition
date. 77
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS - (Continued)
In May 1993, CFC advanced $24.4 million in variable interest rate secured
loans to WVPA, which was used to effect an early redemption of tax-exempt
bonds guaranteed by CFC. As WVPA is in bankruptcy, CFC has classified
this
loanthese loans as nonperforming and, therefore, does not accrue interest
income on the loans. As of May 31, 1994,1995, CFC had $22.9$20.9 million in
loans outstanding to Wabash.
Based on WVPA's preliminary reorganization plan, management believes that
CFC has adequately reserved for any potential loss.
(B)(b) Deseret Generation & Transmission Co-operative ("Deseret") and its major
creditors entered into an Agreement Restructuring Obligations ("ARO")
that restructured Deseret's debt obligations to REA,RUS, CFC and certain
other creditors, including certain lease payments due on the Bonanza
Power Plant. The ARO, which closed in January 1991 with an effective
date of January 1, 1989, provides for the reduction of Deseret's debt
service and rental obligations on the Bonanza Power Plant until 1996 when
large sales of power were intended to commence. Under the ARO, CFC
expected to fund Deseret's cash flow shortfalls totaling $117 million
and expected a maximum exposure of $439 million in 1996. At May 31,
1995, CFC had funded $113.5 million of the shortfall. CFC's current
exposure of $454.0 million is greater than the expected maximum from the
ARO because it loaned Deseret funds to permit the early redemption, at a
premium, of two high interest rate bond issues.
Under the assumptions which formed the basis of the ARO, CFC expects to
fund Deseret's cash flow shortfalls until at least 1996 under its various
guarantees of debt obligations. Deseret's ability to generate enough cash
flow to service its current debt and rental payments as well as to begin
repayment of the shortfall funded by CFC thereafter depends on whether it
is able to make the large power sales on which the ARO is premised. Due
to changes in power demands of Deseret's distribution system members and
the resulting reduction in power available for sale at higher prices to
nonmembers, as well as an inability, so far, to complete the intended
power sales, Deseret's cash flow projections have undergone revision
since the closing of the ARO. As a result of these changes, Deseret is
expected to be unable to satisfy its payment obligations under the ARO,
and the ARO is expected to be amended some time in the future. Under the ARO, CFC expected to fund
Deseret's cash flow shortfalls totaling $117 million and expected a maximum
exposure of $439 million in 1996. At May 31, 1994, CFC had funded $93.8
million of the shortfall. CFC's current exposure of $447.7 million is
greater than the expected maximum from the ARO because it loaned Deseret
funds for the early redemption, at a premium, of two high interest rate
bond issues. If the
parties cannot agree on an amendment, the ARO could be terminated and
Deseret's creditors would be free to pursue remedies on their defaulted
obligations.
On April 25, 1994, Deseret announced that it had entered into an agreement
with Tri-State G&T and PacifiCorp to study the possible acquisition of
Deseret's assets. Deseret has also announced its intention to seeksought proposals from other parties regarding assetsasset and/or power
purchases from Deseret. CFC continues to evaluate these proposals and
Deseret's plans to address the anticipated payment default under the ARO.
CFC has placed all loans to Deseret on a nonaccrual basis with respect to
interest income recognition. CFC does not anticipate interest income
recognition on the outstanding loans until such time that Deseret's power
sales produce cash flows sufficient to service all debts.debt.
As part of a separate agreement, in conjunction with the ARO, CFC will be
obligated to repay out of payments by Deseret $25.9 million (plus
interest) received from a party to the Bonanza Lease transaction to cover
shortfalls in the July 1989, January 1990 and July 1990 lease payments
which were F-25
77
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
funded by that party. This amount would be repaid if the
available annual cash flow were to exceed the debt repayment requirements
as defined in the ARO (i.e., CFC was no longer required to fund a
shortfall).
78
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS - (Continued)
As of May 31, 1994,1995, CFC had approximately $447.7$454.0 million in current credit
exposure to Deseret consisting of $111.5$131.1 million in secured loans and
$336.2$322.9 million in guarantees by CFC of various direct and indirect
obligations of Deseret. CFC's guarantees include $9.3$8.7 million in tax-benefittax-
benefit indemnifications and $32.8$29.9 million relating to mining equipment
for a coal supplier of Deseret. The remainder of CFC's guarantee is for
semiannual debt service payments on $294.1$284.3 million of bonds issued in a
$655 million leverage lease financing of a generating station in 1985.
Under the ARO, CFC has also provided Deseret a $20.0 million five-year
priority secured line of credit. At May 31, 1994,1995, there was no balance
outstanding under this line of credit.credit which expires in January 1996. CFC
has no plans to renew this facility.
CFC believes that, given the underlying collateral value and the terms of
the ARO, it has adequately reserved for any potential loss on its loans
and guarantees to Dereset.
(C)Deseret.
(c) As a consequence of high costs associated with its involvement with the
Clinton Nuclear Station, Soyland Power Cooperative ("Soyland") charged
costs for wholesale power which resulted in its member's retail rates
being uncompetitive. This situation resulted in revenues which were
inadequate to service its debt. Soyland, REARUS and CFC entered into a debt
restructuring agreement, dated as of December 15, 1993, which
restructured Soyland's indebtedness to REA.RUS. As part of this agreement,
CFC agreed to extend additional credit to Soyland in the form of a $30
million revolving credit facility and a $30 million loan for capital
additions. The revolving credit loan and the capital additions loan have
priority in payment over the existing REARUS loans and the prior CFC loan.
At May 31, 1994,1995, CFC had $49.4 million in outstanding long-term loans
to Soyland which were secured equally and ratably with the REARUS on all
assets and future revenues of Soyland. In addition, CFC had $23.3$12.8
million in super
securedsuper-secured lines of credit outstanding to Soyland. These
lines of credit are to be paid before all other secured debt. CFC also
had $384.7$282.9 million in loans to Soyland which are 100% guaranteed by the
U.S. Government.
Soyland has presented the details of a third party offer to purchase most
of Soyland's assets for an amount substantially less than the combined RUS
and CFC debt. The proceeds from any sale of Soyland's assets will be
first applied against the CFC super-secured loans, with any remaining
proceeds split pro-rata between CFC and RUS based on total debt
outstanding to Soyland. The proposal is being reviewed by RUS and CFC.
CFC believes that, given the underlying collateral value of its secured
loans to Soyland, it has adequately reserved for any potential loss on
its loans.
(D)(d) At May 31, 1995, two other borrowers were in payment default to CFC on
secured and unsecured loans totaling $6.7 million. At May 31, 1994,
four other borrowers were in payment default to CFC on secured and unsecured
loans totaling $22.0 million. At May 31, 1993, sixThe two borrowers were in payment default to CFC on secured and unsecured loans
totaling $31.4 million, these six included the four that were in payment default at
May 31, 1995 were also in default at May 31, 1994.
(11) EXTRAORDINARY LOSSExtraordinary Loss
During the yearyears ended May 31, 1995 and 1994, CFC did not incur any
prepayment penalties related to the early retirement of Collateral Trust
Bonds. During the yearsyear ended May 31, 1993, and 1992 CFC paid a prepayment
penaltiespenalty of $3.2 million and $1.4 million, respectively, for the early retirement of Collateral Trust
Bonds.
F-26
78
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)- (Continued)
(12) COMBINED QUARTERLY FINANCIAL RESULTS (UNAUDITED)Combined Quarterly Financial Results (Unaudited)
Summarized results of operations for the four quarters of fiscal
years 19941995 and 19931994 are as follows:
FISCAL YEAR 1994
QUARTERS ENDED
--------------------------------------------------
AUGUST TOTALFiscal Year 1995
(Dollar Amounts In Thousands) Quarters Ended Total
August 31 NOVEMBERNovember 30 FEBRUARYFebruary 28 MAYMay 31 YEAR
------- ----------- ----------- ------- --------
(DOLLAR AMOUNTS IN THOUSANDS)Year
Operating income................. $80,496 $82,110 $83,317 $78,759 $324,682income $97,985 $104,513 $116,210 $121,401 $440,109
Operating margin................. 11,257 11,950 1,963 3,989 29,159margin 13,940 13,437 14,101 325 41,803
Nonoperating income.............. 1,899 513 1,056 561 4,029income 511 1,071 916 911 3,409
Net margins...................... 13,156 12,463 3,019 4,550 33,188margins 14,451 14,508 15,017 1,236 45,212
FISCAL YEAR 1993
QUARTERS ENDED
--------------------------------------------------
AUGUST TOTALFiscal Year 1994
Quarters Ended Total
August 31 NOVEMBERNovember 30 FEBRUARYFebruary 28 MAYMay 31 YEAR
------- ----------- ----------- ------- --------
(DOLLAR AMOUNTS IN THOUSANDS)Year
Operating income................. $87,414 $84,684 $82,933 $81,356 $336,387income $ 80,496 $ 82,110 $83,317 $78,759 $324,682
Operating margin................. 10,403 10,804 9,702 7,443 38,352margin 11,257 11,950 1,963 3,989 29,159
Nonoperating income.............. 1,239 272 1,324 461 3,296
Extraordinary loss............... (3,161) -- -- -- (3,161)income 1,899 513 1,056 561 4,029
Net margins...................... 8,481 11,076 11,026 7,904 38,487margins 13,156 12,463 3,019 4,550 33,188
- - ---------------
NOTE: During fiscal year 1995, CFC made 12 monthly provisions for loan and
guarantee losses of $0.625 million and one special provision of $9.9
million during the fourth quarter. During fiscal year 1994, CFC made
nine monthly provisions for loan and guarantee losses of $0.625
million and one special provisionsprovision of $10.0 million during the third
quarter. During fiscal year 1993, CFC made
regular monthly provisions for loan and guarantee losses of $1.25 million.
F-27
79
EXHIBIT INDEX
EXHIBIT
NUMBER PAGE
- - ------ ----
3.1 -- Articles of Incorporation. Incorporated by reference to Exhibit 3.1 to
Registration Statement No. 2-46018, filed October 12, 1972.
3.2 -- Bylaws. Incorporated by reference to Exhibit 3.2 to CFC's annual report on Form
10-K for the year ended May 31, 1988, filed July 27, 1988.
3.3 -- Amendments to Bylaws as approved by CFC's Board of Directors and members on
February 11, 1993, and a copy of the Bylaws as amended. Incorporated by
reference to Exhibit 3.3 to CFC's annual report on Form 10-K for the year ended
May 31, 1993, filed August 18, 1993.
4.1 -- Form of Capital Term Certificate. Incorporated by reference to Exhibit 4.3
Registration Statement No. 2-46018 filed October 12, 1972.
4.2 -- Revolving Credit Agreements dated May 28, 1993. Incorporated by reference to
exhibit 4.6 to Form 10-K filed August 23, 1993.
4.3 -- Indenture dated as of February 15, 1994, between the Registrant and First Bank
National Association, trustee. Incorporated by reference to Exhibit 4.1 to the
current report on Form 8-K filed by CFC on June 14, 1994.
4.4 -- Amendments to Revolving Credit Agreement dated May 17, 1994.
-- Registrant agrees to furnish to the Commission a copy of all other instruments
defining the rights of holders of its long-term debt upon request.
Management Contracts and Compensatory Plans and Arrangements.
10.1 -- Plan Document for CFC deferred compensation program. Incorporated by reference
to Exhibit 10 to Registration Statement No. 2-70355, filed December 23, 1980.
10.2 -- Supplemental Benefit Agreement between CFC and Charles B. Gill dated January
11, 1983, as amended. Incorporated by reference to Exhibit 10.2 to CFC's annual
report on Form 10-K for the year ended May 31, 1983.
10.3 -- Second Amendment to Supplemental Benefit Agreement between CFC and Charles B.
Gill dated May 29, 1986. Incorporated by reference to Exhibit 10.3 to CFC's
annual report on Form 10-K for the year ended May 31, 1986.
10.4 -- Third Amendment to Supplemental Benefit Agreement between CFC and Charles B.
Gill dated April 1, 1989. Incorporated by reference to Exhibit 10.4 to CFC's
annual report on Form 10-K for the year ended May 31, 1989.
10.5 -- Fourth Amendment to Supplemental Benefit Agreement between CFC and Charles B.
Gill dated April 1, 1993. Incorporated by reference to Exhibit 10.5 to CFC's
annual report on Form 10-K for the year ended May 31, 1993.
10.6 -- Fifth Amendment to Supplemental Benefit Agreement between CFC and Charles B.
Gill dated May 26, 1994.
12 -- Computations of ratio of margins to fixed charges.
23 -- Consent of Arthur Andersen & Co.
quarter