Rural Electric Cooperative Grantor Trust Kepco Series 1997 10-K 2005 FY Annual report

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF

THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2005

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF

THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number 333-25029

RURAL ELECTRIC COOPERATIVE GRANTOR TRUST (KEPCO) SERIES 1997

(Exact name of registrant as specified in its charter)

NEW YORK

(State or other jurisdiction of incorporation or organization)

(36-7233686)

(I.R.S. Employer Identification Number)

2201 Cooperative Way, Herndon, VA 20171-3025

(Address of principal executive offices)

(Registrant's telephone number, including area code, is 703-709-6700)

Securities Registered pursuant to Section 12(b) of the Act: None.

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes X No __

The Registrant is not an accelerated filer.

The Registrant has no common or voting stock.

DOCUMENTS INCORPORATED BY REFERENCE:

None.

Part I
Item 3.	Legal Proceedings
		None.
Item 4.	Submission of Matters to a Vote of Security Holders
		None.
Part II
Item 5.	Market for the Registrant's Common Equity and Related Stockholder Matters
	a)	There is no established trading market for the certificates representing ownership of the beneficial interest in the Rural Electric Cooperative Grantor Trust (KEPCO) Series 1997 (the "Trust").
	b)	As of December 31, 2005 there was one record holder of certificates representing ownership of the beneficial interest in the Trust.
Item 8.	Financial Statements and Supplementary Data
		See attached audited financial statements.
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
		None.
2

Part III
Item 13.	Certain Relationships and Related Transactions
		None
Part IV
Item 15.	Exhibits and Financial Statement Schedules and Reports on Form 8-K
	The following documents are filed as part of this report:
	1.	Financial Statements
		Report of Independent Registered Public Accounting Firm
		Report of Independent Registered Public Accounting Firm
		Balance Sheets as of December 31, 2005 and 2004
		Statements of Income and Expenses for the Years Ended December 31, 2005, 2004 and 2003
		Statements of Changes in Deficit for the Years Ended December 31, 2005, 2004 and 2003
		Statements of Cash Flows for the Years Ended December 31, 2005, 2004 and 2003
		Notes to Financial Statements
	2.	Financial Statement Schedules are omitted because they are inapplicable.
	3.	Exhibits

	Exhibit
	Number	Description of Exhibit
	4.1	Form of Trust Agreement, including the form of Rural Electric Cooperative Grantor Trust Certificate (incorporated by reference to Exhibit 4.1 to Registration Statement on Form S-1 [No. 333-25029]).
	4.2	First Amendment to Trust Agreement (incorporated by reference to Exhibit 4.2 to Registration Statement on Form S-1 [No. 333-25029]).
	10.1	Loan Agreement dated as of February 15, 1988 between CFC and the Cooperative (including form of Note and Guarantee) (incorporated by reference to Exhibit 10.1 to Registration Statement on Form S-1 [No. 33-16789 filed on August 27, 1987]).
	10.2	First Amendment to Loan Agreement (incorporated by reference to Exhibit 10.2 to Registration Statement on Form S-1 [No. 333-25029]).
	10.3	Loan Guarantee and Servicing Agreement, dated as of February 15, 1988, among the Administrator of the RUS, the Cooperative, the Servicer, the Lender and the Trustee (incorporated by reference to Exhibit 10.2 to Registration Statement on Form S-1 [No. 33-16789 filed on August 27, 1987]).
	10.4	First Amendment to Loan Guarantee and Servicing Agreement (incorporated by reference to Exhibit 10.4 to Registration Statement on Form S-1 [No. 333-25029]).
	10.5	Remarketing Agreement (incorporated by reference to Exhibit 10.5 to Registration Statement on Form S-1 [No. 333-25029]).
	10.6	Swap Agreement (incorporated by reference to Exhibit 10.6 to Registration Statement on Form S-1 [No. 333-25029]).
3
	10.7	Liquidity Protection (incorporated by reference to Exhibit 10.7 to Registration Statement on Form S-1 [No. 333-25029]).
	10.8	Form of Standby Certificate Purchase Agreement (incorporated by reference to Exhibit 10.8 to Registration Statement on Form S-1 [No. 333-25029]).
	12	Computations of ratio of margin to fixed charges.
	99	JP Morgan Chase & Co. (successor to Morgan Guaranty Trust Co. of NY) and Morgan Guaranty Trust Company of New York (Swap Counterparty) Financial Information.
	31.1	Certification of the Chief Executive Officer required by Section 302 of the Sarbanes-Oxley Act of 2002.
	31.2	Certification of the Chief Financial Officer required by Section 302 of the Sarbnes-Oxley Act of 2002.
	32.1	Certification of the Chief Executive Officer required by Section 906 of the Sarbanes-Oxley Act of 2002.
	32.2	Certification of the Chief Financial Officer required by Section 906 of the Sarbanes-Oxley Act of 2002.

b)	Forms 8-K dated June 15, 2005 and December 15, 2005.
	Semi-annual Reports to Certificate holders dated June 15, 2005 and December 15, 2005.

Supplemental information to be furnished with reports filed pursuant to Section 15(d) of the Act by Registrants which have not registered securities pursuant to Section 12 of the Act.

No annual report, proxy statement, form of proxy or other proxy soliciting material has been sent to Certificate holders, and the Registrant does not presently contemplate sending any such material subsequent to the filing of this report.

Pursuant to the requirements of Section 13 or 15(d) of the Securities 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 30^st day of March, 2006.

RURAL ELECTRIC COOPERATIVE GRANTOR TRUST (KEPCO) SERIES 1997

By:	NATIONAL RURAL UTILITIES COOPERATIVE
	FINANCE CORPORATION as Servicer

	By:	/s/ SHELDON C. PETERSEN
		Sheldon C. Petersen, Governor and
		Chief Executive Officer
4

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Trustee of
Rural Electric Cooperative Grantor Trust
(KEPCO) Series 1997
Herndon, Virginia, and

To the Board of Directors of
National Rural Utilities Cooperative Finance Corporation
Herndon, Virginia

We have audited the accompanying balance sheets of Rural Electric Cooperative Grantor Trust (KEPCO) Series 1997 ("the Trust") as of December 31, 2005 and 2004, and the related statements of income and expenses, changes in deficit and cash flows for each of the two years in the period ended December 31, 2005. These financial statements are the responsibility of the Trust's management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Trust is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting.  Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Trust's internal control over financial reporting.  Accordingly, we express no such opinion.  An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.  We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such financial statements present fairly, in all material respects, the financial position of the Trust as of December 31, 2005 and 2004, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2005, in conformity with accounting principles generally accepted in the United States of America.

/s/ Deloitte & Touche LLP

McLean, Virginia

March 24, 2006

5

Report of Independent Registered Public Accounting Firm

To the Trustee of

Rural Electric Cooperative Grantor Trust

     (KEPCO) Series 1997, and

To the Board of Directors of

National Rural Utilities Cooperative

     Finance Corporation

We have audited the accompanying statements of income and expenses and changes in deficit and cash flows of Rural Electric Cooperative Grantor Trust (KEPCO) Series 1997 (the "Trust") for the year ended December 31, 2003. These financial statements are the responsibility of the Trust's management. Our responsibility is to express an opinion on these financial statements based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Trust's internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Trust's internal control over financial reporting. Accordingly we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the results of operations and cash flows of Rural Electric Cooperative Grantor Trust (KEPCO) Series 1997 for the year ended December 31, 2003, in conformity with U.S. generally accepted accounting principles.

Ernst & Young LLP

McLean, Virginia

March 19, 2004

6

RURAL ELECTRIC COOPERATIVE GRANTOR TRUST (KEPCO) SERIES 1997

BALANCE SHEETS

DECEMBER 31, 2005 AND 2004

ASSETS		2005		2004
Interest receivable - KEPCO	$	274,994	$	286,495
Interest receivable - swap counterparty		138,114		92,949
Note receivable

45,640,000

  

47,740,000

     Total assets

$

46,053,108

  

$

48,119,444

 

LIABILITIES and DEFICIT

       

Interest payable - Grantor Trust Certificates

$

138,114

  

$

92,949

 

Servicer fees payable

 

3,366

   

3,507

 

Interest payable - swap counterparty

 

271,628

   

282,988

 

Rural Electric Cooperative Grantor Trust Certificates

 

45,640,000

   

47,740,000

 

Derivative liability

 

6,758,313

   

9,153,662

     Total liabilities

 

52,811,421

   

57,273,106

 

Retained deficit

 

(9,386,569

)  

(12,165,533

) 

Accumulated other comprehensive income

 

2,628,256

   

3,011,871

 

     Total deficit

 

(6,758,313

) 

(9,153,662

)

     Total liabilities & deficit

$

46,053,108

 

$

48,119,444

 

See accompanying notes.

7

RURAL ELECTRIC COOPERATIVE GRANTOR TRUST (KEPCO) SERIES 1997

STATEMENTS OF INCOME AND EXPENSES

YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003

		2005		2004		2003
INCOME
Interest on note receivable	$	3,619,717	$	3,774,810	$	3,894,560
Interest from swap counterparty		1,577,435		716,221		617,143
Total income		5,197,152		4,491,031		4,511,703
EXPENSES
Interest to certificate holders		1,577,435		716,221		617,143
Interest to swap counterparty		3,575,406		3,728,600		3,846,884
Servicer fees		44,311		46,210		47,676
Total expenses		5,197,152		4,491,031		4,511,703
SFAS 133 forward value adjustment		2,778,964		1,582,063		2,649,822
Net income	$	2,778,964	$	1,582,063	$	2,649,822

See accompanying notes.

8

RURAL ELECTRIC COOPERATIVE GRANTOR TRUST (KEPCO) SERIES 1997

STATEMENTS OF CHANGES IN DEFICIT

YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003

				Accumulated
				Other
	Retained			Comprehensive			Total
	Deficit			Income			Deficit
Balance as of 12/31/02	$	(16,397,418	)	$	3,833,054		$	(12,564,364	)
Amortization of SFAS 133
transition adjustment		-			(422,300	)		(422,300	)
Net income		2,649,822			-			2,649,822
Total comprehensive income								2,227,522
Balance as of 12/31/03		(13,747,596	)		3,410,754			(10,336,842	)
Amortization of SFAS 133
transition adjustment		-			(398,883	)		(398,883	)
Net income		1,582,063			-			1,582,063
Total comprehensive income								1,183,180
Balance as of 12/31/04		(12,165,533	)		3,011,871			(9,153,662	)
Amortization of SFAS 133		-
transition adjustment					(383,615	)		(383,615	)
Net income		2,778,964			-			2,778,964
Total comprehensive income								2,395,349
Balance as of 12/31/05	$	(9,386,569	)	$	2,628,256		$	(6,758,313	)

See accompanying notes.

9

RURAL ELECTRIC COOPERATIVE GRANTOR TRUST (KEPCO) SERIES 1997

STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003

		2005			2004			2003
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	2,778,964		$	1,582,063		$	2,649,822
Adjustments to reconcile net income to net cash provided by operating activities:
Decrease in interest receivable - KEPCO      (Increase) decrease in interest receivable - swap counterparty		11,501 (45,165	)		288 (37,720	)		8,873 1,305
SFAS 133 forward value adjustment		(2,778,964	)		(1,582,063	)		(2,649,822	)
Increase (decrease) in interest payable- Grantor Trust Certificates		45,165			37,720			(1,305	)
Decrease in interest payable - swap counterparty

(11,360

)

 

(284

)

 

(8,765

)

     Decrease in servicer fees payable

 

(141

)

 

(4

)

 

(108

)

Principal received on note receivable

 

2,100,000

  

1,900,000

  

1,700,000

 

Principal payment to certificate holders

 

(2,100,000

)

 

(1,900,000

)

 

(1,700,000

)

          

Net cash provided by operating activities

 

-

  

-

  

-

                    

CASH, beginning of year

 

-

  

-

  

-

           

CASH, end of year

$

-

 $

-

 $

-

                     

SUPPLEMENTAL DISCLOSURE OF

         

CASH FLOW INFORMATION:

                   

Cash paid during the year for interest expense on certificates

$

1,532,270

 $

669,400

 $

617,143

                     

See accompanying notes.

10

RURAL ELECTRIC COOPERATIVE GRANTOR TRUST (KEPCO) SERIES 1997

NOTES TO FINANCIAL STATEMENTS

AS OF DECEMBER 31, 2005 AND 2004

1.	ORGANIZATION AND OPERATIONS
	Rural Electric Cooperative Grantor Trust (KEPCO) Series 1997 (the "Trust") was formed under a Trust Agreement dated December 20, 1996 among National Rural Utilities Cooperative Finance Corporation ("CFC"), Kansas Electric Power Cooperative, Inc. (the "Cooperative") and Bank One, formerly The First National Bank of Chicago (the "Trustee"). The assets of the Trust consist of lender loan notes (the "1997 Note") bearing interest at 7.597% and maturing in 2017. In addition, the Trust also holds certain rights under an interest rate swap agreement (the "Swap Agreement"). Effective September 2, 2004, U. S. Bank Trust National Association replaced Bank One as Trustee.
	Rural Electric Cooperative Grantor Trust (KEPCO) Trusts K-1 and K-2 were created on February 15, 1988 resulting from a refinancing of loans from the Federal Financing Bank ("FFB") which were guaranteed by the Rural Electrification Administration, as predecessor in intent to the Rural Utilities Service ("RUS"). The FFB loans were refinanced through CFC and in exchange the Cooperative executed lender loan notes (the "Notes") to CFC. CFC then deposited the Notes into separate Trusts. In turn, the Trusts issued to CFC, as depositor of the Trusts, two certificates: Rural Electric Cooperative Grantor Trust (KEPCO) 9.23% Certificates, due 2002 and Rural Electric Cooperative Grantor Trust (KEPCO) 9.73% Certificates, due 2017 (the "Certificates") in the amounts of $11,075,000 and $51,340,000, respectively. The Certificates were not subject to full redemption prior to December 15, 1997. On December 18, 1997, the Notes were refinanced, the outstanding Certificates were redeemed, and Trusts K-1 and K-2 were terminated. The Notes in the outstanding principal amount of $57,390,000 were then deposited into the Trust. The Notes are guaranteed (the "Guarantee") as to timely payment of principal and interest by the United States of America, acting through the Administrator of RUS. The General Counsel of the USDA has issued an opinion that the Guarantee is supported by the full faith and credit of the United States of America. The Trust issued Certificates of beneficial interest (the "Series 1997 Certificates") which bear interest at a variable rate and mature in 2017.
	In order to mitigate the interest rate risk inherent in the Trust, which holds a fixed rate asset (the 1997 Note) and a variable rate obligation, the Cooperative assigned to the Trust certain rights under a Swap Agreement in 1997. The counterparty to the Swap Agreement is JP Morgan Chase & Co. (successor to Morgan Guaranty Trust Company of New York, "Morgan"). Pursuant to the Swap Agreement, the Trust pays to Morgan a fixed rate of interest on the outstanding notional amount, and Morgan pays the Trust a variable rate of interest on the outstanding notional amount. The structure is designed such that the interest amounts paid by the Cooperative to the Trust are the same amounts paid to Morgan, pursuant to the Swap Agreement, plus the amounts payable to CFC, as servicer. The amounts Morgan pays to the Trust under the Swap Agreement are the same amounts as the interest payable by the Trust to the Certificate holders.
	The notional amount of the Swap Agreement (which is not included on the Trust's Balance Sheet) was established at $57,390,000 and declines in amount over time such that the outstanding notional amount is always equal to the outstanding balance of the 1997 Note and the Series 1997 Certificates. The Swap Agreement terminates in 2017, but is subject to early termination upon the early redemption of the Certificates.
	Derivative Financial Instruments
	The Trust is neither a dealer nor a trader in derivative financial instruments. The Trust uses derivatives to manage its interest rate risk.
	On January 1, 2001, the Trust implemented Statement of Financial Accounting Standards ("SFAS") No. 133, Accounting for Derivative Instruments and Hedging Activities. On January 1, 2001, as a transition adjustment, the Trust recorded a derivative asset of $4,628,105 with a corresponding credit to other comprehensive income to record the interest rate swap agreement on the balance sheet at its fair value. The interest rate swap agreement was not designated as a hedge on January 1, 2001 and has not been designated as a hedge since that date. Therefore, in accordance with the provisions of SFAS 133, all changes in the swap agreement's fair value subsequent to January 1, 2001 have been recorded through earnings as a SFAS 133 forward value adjustment.
11

The swap agreement had a negative fair value of $6,758,313 and $9,153,662 and is reflected on the balance sheet as a derivative liability as of December 31, 2005 and 2004, respectively. For the years ended December 31, 2005, 2004 and 2003, respectively, the Trust recorded mark-to-market adjustments on the swap agreement of $2,395,349, $1,183,180 and $2,227,522 which increased income and are reflected in the statements of income and expenses as SFAS 133 forward value adjustments. Also included in the SFAS 133 forward value adjustment amounts is amortization of $383,615, $398,883, and $422,300 of the transition adjustment from other comprehensive income to earnings for the years ended December 31, 2005, 2004 and 2003, respectively. A total of $366,741 is expected to be amortized over the next twelve months. The transition adjustment will continue to be amortized over the life of the interest rate swap agreement, which matures on December 4, 2017.

Consistent with the pass-through substance of the Trust, all amounts that the Trust receives and pays related to the swap agreement are included at gross amounts in the statements of income and expenses as interest on swap agreement and interest to swap counterparty, respectively. All interest receivable and payable on the swap agreement are included in the balance sheet as interest receivable - swap counterparty and interest payable - swap counterparty, respectively.

Grantor Trust Certificates

Principal payments on the Certificates began in 1998 and will extend over a period of twenty years. The principal payments over the next 5 years and thereafter are as follows:

Years Ending December 31
2006	$ 2,300,000
2007	2,500,000
2008	2,800,000
2009	3,100,000
2010	3,500,000
Thereafter	31,440,000
Total	$45,640,000

	The Certificates are subject to redemption at any time at the remaining principal amount plus accrued interest. The principal payments received on the Note from the Cooperative coincide with the payments due to the certificate holders.
	Each Certificate represents an undivided fractional interest in the Trust. CFC is the depositor of the Trust and acts as servicer of the Note.
2.	TAX STATUS OF THE TRUST
	It is expected that the Trust will not have any liability for federal or state income taxes for the current or future years.
3.	NOTE RECEIVABLE, INTEREST AND SERVICER FEE ACCOUNTING
	The Trust accounts for its note receivable at cost. No allowance for loan losses has been recorded due to the guarantee provided by the United States of America. The Trust records interest income as it is earned and accrues interest expense and servicer fees as they are incurred. Servicer fees represent .093% of the outstanding principal balance of the Note.
4.	COMPREHENSIVE INCOME
	Comprehensive income includes other comprehensive income related to the transition adjustment recorded when SFAS 133 was adopted in 2001 and the Trust's reported earnings.
12

5.	FAIR VALUE OF FINANCIAL INSTRUMENTS
	The carrying amounts reported for interest receivable, interest payable, and servicer fees payable approximate fair values due to the short-term maturity of these instruments.
	Use of Estimates
	The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reported period. The estimates involve judgments with respect to, among other things, various future factors which are difficult to predict and are beyond the control of the Trust. With regards to the fair values below, actual amounts could differ from these estimates.
	The following disclosure of the estimated fair value of financial instruments is made in accordance with SFAS No. 107, Disclosure about Fair Value of Financial Instruments. Whenever possible, the estimated fair value amounts have been determined using quoted market information as of December 31, 2005 and 2004 along with other valuation methodologies. Below is a summary of significant methodologies used in estimating fair value amounts and a schedule of fair values at December 31, 2005 and 2004.
	Note receivable
	Fair value is 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.
	Rural Electric Cooperative Grantor Trust Certificates
	The trust certificates pay a variable rate of interest that is reset weekly, and as such are considered to be carried at fair value.
	Derivative liability
	The fair market value is provided by the swap counterparty and is estimated taking into account the current market rate of interest.
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The carrying and estimated fair values of the Trust's financial instruments as of December 31, 2005 and 2004 are as follows:

		2005				2004
		Carrying		Fair		Carrying		Fair
		Value		Value		Value		Value
Assets:
Interest receivable - KEPCO	$	274,994	$	274,994	$	286,495	$	286,495
Interest receivable - swap counterparty		138,114		138,114		92,949		92,949
Note receivable		45,640,000		52,601,627		47,740,000		56,376,039
Liabilities:
Interest payable - Grantor
Trust Certificates		138,114		138,114		92,949		92,949
Servicer fees payable		3,366		3,366		3,507		3,507
Interest payable - swap counterparty		271,628		271,628		282,988		282,988
Rural Electric Cooperative
Grantor Trust Certificates		45,640,000		45,640,000		47,740,000		47,740,000
Derivative liability		6,758,313		6,758,313		9,153,662		9,153,662
14