FORM 10-Q/A | |||
(Amendment No. 1) | |||
UNITED STATES | |||
SECURITIES AND EXCHANGE COMMISSION | |||
Washington, D.C. 20549 | |||
| |||
X | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) | ||
OF THE SECURITIES EXCHANGE ACT OF 1934 | |||
For the Quarterly Period Ended November 30, 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 1-7102 | |||
| |||
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION | |||
(Exact name of registrant as specified in its charter) | |||
| |||
| |||
DISTRICT OF COLUMBIA | 52-0891669 | ||
(State or other jurisdiction of | (I.R.S. Employer | ||
incorporation or organization) | Identification No.) | ||
| |||
| |||
Woodland Park, 2201 Cooperative Way, Herndon, VA 20171-3025 | |||
(Address of principal executive offices) | |||
| |||
| |||
Registrant's telephone number, including the area code (703) 709-6700 | |||
| |||
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO _ | |||
| |||
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes __ No X | |||
| |||
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes __ No X . | |||
| |||
The Registrant has no stock. | |||
| |||
Page 1 of 32 |
Explanatory Note |
We are filing this amendment to National Rural Utilities Cooperative Finance Corporation's ("CFC" or the "Company") Quarterly Report on Form 10-Q for the period ended November 30, 2005 to correct a typographical error in a footnote presented on the statement of operations, the statement of changes in equity and the statement of cash flows. The footnote is directing the reader to the restatement footnote. The note included on the statements filed by the Company on January 19, 2006 directs the reader to note 1(t). The reader should be directed to note 1(f). This amendment will correct the footnote reference. |
PART 1. | FINANCIAL INFORMATION |
| |
Item 1. | Financial Statements. |
| |
| |
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION | |
| |
CONSOLIDATED BALANCE SHEETS | |
(UNAUDITED) | |
(in thousands) | |
A S S E T | |
November 30, 2005 | May 31, 2005 | |||||||
Cash and cash equivalents | $ | 222,922 | $ | 418,514 | ||||
Loans to members | 18,146,758 | 18,972,068 | ||||||
Less: Allowance for loan losses | (593,532 | ) | (589,749 | ) | ||||
Loans to members, net | 17,553,226 | 18,382,319 | ||||||
Receivables | 308,808 | 299,350 | ||||||
Fixed assets, net | 6,292 | 42,496 | ||||||
Debt service reserve funds | 93,182 | 93,182 |
| |||||
Bond issuance costs, net | 53,220 | 56,492 | ||||||
Foreclosed assets | 119,390 | 140,950 | ||||||
Derivative assets | 511,943 | 584,863 | ||||||
Other assets | 26,827 |
27,922
$
18,895,810
$
20,046,088
See accompanying notes. |
|
2 |
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION |
|
CONSOLIDATED BALANCE SHEETS |
(UNAUDITED) |
(in thousands) |
|
L I A B I L I T I E S A N D E Q U I T Y |
November 30, 2005 | May 31, 2005 | |||||||
Short-term debt | $ | 2,494,111 | $ | 2,952,579 | ||||
Accrued interest payable | 304,637 | 256,011 | ||||||
Long-term debt | 13,031,293 | 13,701,955 | ||||||
Deferred income | 52,145 | 51,219 | ||||||
Guarantee liability | 14,537 | 16,094 | ||||||
Other liabilities | 34,700 | 26,596 | ||||||
Derivative liabilities | 73,463 | 78,471 | ||||||
Subordinated deferrable debt | 685,000 | 685,000 | ||||||
Members' subordinated certificates: | ||||||||
Membership subordinated certificates | 650,582 | 663,067 | ||||||
Loan and guarantee subordinated certificates | 781,467 | 827,683 | ||||||
Total members' subordinated certificates | 1,432,049 | 1,490,750 | ||||||
Minority interest | 21,222 | 18,652 | ||||||
Equity: | ||||||||
Retained equity | 737,698 | 752,632 | ||||||
Accumulated other comprehensive income | 14,955 | 16,129 | ||||||
Total equity | 752,653 | 768,761 | ||||||
$ |
18,895,810
$
20,046,088
See accompanying notes. |
|
3 |
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION |
|
CONSOLIDATED STATEMENTS OF OPERATIONS |
(UNAUDITED) |
(in thousands) |
|
For the Three and Six Months Ended November 30, 2005 and 2004 |
|
Three Months Ended | Six Months Ended | |||||||||||||||
November 30, | November 30 | |||||||||||||||
| 2004 |
| 2004 | |||||||||||||
Operating income | $ | 240,801 | $ | 281,304 | $ | 488,162 | $ | 528,429 | ||||||||
Cost of funds | (233,568 | ) | (226,803 | ) | (466,329 | ) | (455,181 | ) | ||||||||
Gross margin | 7,233 | 54,501 | 21,833 | 73,248 | ||||||||||||
Operating expenses: | ||||||||||||||||
General and administrative expenses | (12,751 | ) | (11,808 | ) | (24,868 | ) | (24,215 | ) | ||||||||
Rental and other income | 13 | 1,275 | 1,475 | 2,657 | ||||||||||||
Provision for loan losses | (3,886 | ) | - | (3,886 | ) | - | ||||||||||
(Provision for) recovery of guarantee losses | (700 | ) |
700
2,600
1,107
Total operating expenses
(17,324
)
(9,833
)
(24,679
)
(20,451
)
Results of operations of foreclosed assets
3,878
2,928
8,570
5,355
Derivative and foreign currency adjustments:
Derivative cash settlements
16,816
(6,414
)
37,016
13,884
Derivative forward value
(15,716
)
83,904
(50,605
)
138,648
Foreign currency adjustments
35,739
(84,212
)
34,479
(79,072
)
Total gain (loss) on derivative and
foreign currency adjustments
36,839
(6,722
)
20,890
73,460
Operating margin
30,626
40,874
26,614
131,612
Gain on sale of building and land
37,740
-
37,740
-
Margin prior to income tax expense
68,366
40,874
64,354
131,612
Income tax expense
(1,530
)
(648
(1,729
(843
)
Margin prior to minority interest
66,836
40,226
62,625
130,769
Minority interest
(3,107
(1,260
(4,213
(1,862
)
Net margin
$
63,729
38,966
58,412
128,907
See accompanying notes.
* See Note 1 (f)
4
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION |
|
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY |
(UNAUDITED) |
(in thousands) |
|
For the Three Months Ended November 30, 2005 and 2004 |
|
Patronage Capital | ||||||||||||||||||||||||||||||||||||||
Accumulated | Allocated | |||||||||||||||||||||||||||||||||||||
Other | Subtotal | Members' | General | |||||||||||||||||||||||||||||||||||
Comprehensive | Retained | Membership | Unallocated | Education | Capital | Reserve | ||||||||||||||||||||||||||||||||
Total | Income (Loss) | Equity | Fees | Margin | Fund | Reserve | Fund | Other | ||||||||||||||||||||||||||||||
Quarter ended November 30, 2005: | ||||||||||||||||||||||||||||||||||||||
Balance as of August 31, 2005 | $ | 688,919 | $ | 14,790 | $ | 674,129 | $ | 993 | $ | 223,732 | $ | 926 | $ | 164,067 | $ | 497 | $ | 283,914 | ||||||||||||||||||||
Operating margin | 30,626 | - | 30,626 | - | 30,626 | - | - | - | - | |||||||||||||||||||||||||||||
Gain on sale of building and land | 37,740 | - | 37,740 | - | 37,740 | - | - | - | - | |||||||||||||||||||||||||||||
Accumulated other |
| |||||||||||||||||||||||||||||||||||||
comprehensive income | 165 | 165 | - | - | - | - | - | - | - | |||||||||||||||||||||||||||||
Income tax expense | (1,530 | ) | - | (1,530 | ) | - | (1,530 | ) | - | - | - | - | ||||||||||||||||||||||||||
Minority interest | (3,107 | ) | - | (3,107 | ) | - | (3,107 | ) | - | - | - | - | ||||||||||||||||||||||||||
Other | (160 | ) | - | (160 | ) | - | - | (160 | ) | (30) | ) | - | 30 | |||||||||||||||||||||||||
Balance as of November 30, 2005 | $ | 752,653 | $ | 14,955 | $ | 737,698 | $ | 993 | $ | 287,461 | $ | 766 | $ | 164,037 | $ | 497 | $ | 283,944 | ||||||||||||||||||||
| ||||||||||||||||||||||||||||||||||||||
Quarter ended November 30, 2004: |
| |||||||||||||||||||||||||||||||||||||
Balance as of August 31, 2004 | $ | 719,879 | $ | (8,333 | ) | $ | 728,212 | $ | 993 | $ | 312,551 | $ | 1,020 | $ | 131,296 | $ | 497 | $ | 281,855 | |||||||||||||||||||
Patronage capital retirement | (8,458 | ) | - | (8,458 | ) | - | - | - | - | - | (8,458 | ) | ||||||||||||||||||||||||||
Operating margin (As restated)* | 40,874 | - | 40,874 | - | 40,874 | - | - | - | - | |||||||||||||||||||||||||||||
Accumulated other |
| |||||||||||||||||||||||||||||||||||||
comprehensive income (As restated)* | 20,445 | 20,445 | - | - | - | - | - | - | - | |||||||||||||||||||||||||||||
Income tax expense | (648 | ) | - | (648 | ) | - | (648 | ) | - | - | - | - | ||||||||||||||||||||||||||
Minority interest | (1,260 | ) | - | (1,260 | ) | - | (1,260 | ) | - | - | - | - | ||||||||||||||||||||||||||
Other | (198 | ) | - | (198 | ) | (2 | ) | - | (196 | ) | - | - | - | |||||||||||||||||||||||||
Balance as of November 30, 2004 (As restated)* | $ | 770,634 | $ | 12,112 | $ | 758,522 | $ | 991 | $ | 351,517 | $ | 824 | $ | 131,296 | $ | 497 | $ | 273,397 | ||||||||||||||||||||
See accompanying notes. |
* See Note 1 (f) |
|
5 |
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION |
|
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY |
(UNAUDITED) |
(in thousands) |
|
For the Six Months Ended November 30, 2005 and 2004 |
|
Patronage Capital | ||||||||||||||||||||||||||||||||||||||
Accumulated | Allocated | |||||||||||||||||||||||||||||||||||||
Other | Subtotal | Members' | General | |||||||||||||||||||||||||||||||||||
Comprehensive | Retained | Membership | Unallocated | Education | Capital | Reserve | ||||||||||||||||||||||||||||||||
Total | Income (Loss) | Equity | Fees | Margin | Fund | Reserve | Fund | Other | ||||||||||||||||||||||||||||||
Six months ended November 30, 2005: | ||||||||||||||||||||||||||||||||||||||
Balance as of May 31, 2005 | $ | 768,761 | $ | 16,129 | $ | 752,632 | $ | 993 | $ | 229,049 | $ | 1,200 | $ | 164,067 | $ | 497 | $ | 356,826 | ||||||||||||||||||||
Patronage capital retirement | (72,912 | ) | - | (72,912 | ) | - | - | - | - | - | (72,912 | ) | ||||||||||||||||||||||||||
Operating margin | 26,614 | - | 26,614 | - | 26,614 | - | - | - | - | |||||||||||||||||||||||||||||
Gain on sale of building and land | 37,740 | - | 37,740 | - | 37,740 | - | - | - | - | |||||||||||||||||||||||||||||
Accumulated other | ||||||||||||||||||||||||||||||||||||||
comprehensive income | (1,174 | ) | (1,174 | ) | - | - | - | - | - | - | - | |||||||||||||||||||||||||||
Income tax expense | (1,729 | ) | - | (1,729 | ) | - | (1,729 | ) | - | - | - | - | ||||||||||||||||||||||||||
Minority interest | (4,213 | ) | - | (4,213 | ) | - | (4,213 | ) | - | - | - | - | ||||||||||||||||||||||||||
Other | (434 | ) | - | (434 | ) | - | - | (434 | ) | (30) | - | 30 | ||||||||||||||||||||||||||
Balance as of November 30, 2005 | $ | 752,653 |
|
| $ | 737,698 | $ | 993 | $ | 287,461 | $ | 766 | $ | 164,037 | $ | 497 | $ | 283,944 | ||||||||||||||||||||
| ||||||||||||||||||||||||||||||||||||||
Six months ended November 30, 2004: | ||||||||||||||||||||||||||||||||||||||
Balance as of May 31, 2004 | $ | 695,734 | $ | (12,108 | ) | $ | 707,842 | $ | 993 | $ | 222,610 | $ | 1,322 | $ | 131,296 | $ | 497 | $ | 351,124 | |||||||||||||||||||
Patronage capital retirement | (77,727 | ) | - | (77,727 | ) | - | - | - | - | - | (77,727 | ) | ||||||||||||||||||||||||||
Operating margin (As restated)* | 131,612 | - | 131,612 | - | 131,612 | - | - | - | - | |||||||||||||||||||||||||||||
Accumulated other | ||||||||||||||||||||||||||||||||||||||
comprehensive income (As restated)* | 24,220 | 24,220 | - | - | - | - | - | - | - | |||||||||||||||||||||||||||||
Income tax expense | (843 | - | (843 | ) | - | (843 | ) | - | - | - | - | |||||||||||||||||||||||||||
Minority interest | (1,862 | ) | - | (1,862 | ) | - | (1,862 | ) | - | - | - | - | ||||||||||||||||||||||||||
Other | (500 | ) | - | (500 | ) | (2 | ) | - | (498 | ) | - | - | - | |||||||||||||||||||||||||
Balance as of November 30, 2004 (As restated)* | $ | 770,634 | $ | 12,112 | $ | 758,522 | $ | 991 | $ | 351,517 | $ | 824 | $ | 131,296 | $ | 497 | $ | 273,397 | ||||||||||||||||||||
See accompanying notes. |
* See Note 1 (f) |
|
6 |
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION |
|
CONSOLIDATED STATEMENTS OF CASH FLOWS |
(UNAUDITED) |
(in thousands) |
|
For the Six Months Ended November 30, 2005 and 2004 |
| 2004 | |||||||
CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
Net margin | $ | 58,412 | $ | 128,907 | ||||
Add (deduct): | ||||||||
Amortization of deferred income | (7,239 | ) | (9,192 | ) | ||||
Amortization of bond issuance costs and deferred charges | 5,963 | 7,342 | ||||||
Depreciation | 1,073 | 1,581 | ||||||
Provision for loan losses | 3,886 | - | ||||||
Recovery of guarantee losses | (2,600 | ) | (1,107 | ) | ||||
Results of operations of foreclosed assets | (8,570 | ) | (5,355 | ) | ||||
Derivative forward value | 50,605 | (138,648 | ) | |||||
Foreign currency adjustments | (34,479 | ) | 79,072 | |||||
Gain on sale of building and land | (37,740 | ) | - | |||||
Changes in operating assets and liabilities: | ||||||||
Receivables | (23,496 | ) | (34,360 | ) | ||||
Accrued interest payable | 48,626 | 84,061 | ||||||
Other |
(183
)
21,102
Net cash provided by operating activities
54,258
133,403
CASH FLOWS FROM INVESTING ACTIVITIES:
Advances made on loans
(2,517,190
)
(3,468,170
)
Principal collected on loans
3,338,879
4,434,963
Net investment in fixed assets
(3,730
)
(2,201
)
Net cash provided by foreclosed assets
1,348
79,335
Net proceeds from sale of foreclosed assets
28,782
-
Net proceeds from sale of building and land
77,428
-
Net cash provided by investing activities
925,517
1,043,927
CASH FLOWS FROM FINANCING ACTIVITIES:
(Repayments) proceeds from issuance of short-term debt, net
(2,038,947
)
509,115
Proceeds from issuance of long-term debt, net
1,132,055
170,763
Payments for retirement of long-term debt
(166,750
)
(1,204,925
)
Proceeds from issuance of members' subordinated certificates
27,030
55,186
Payments for retirement of members' subordinated certificates
(71,427
)
(182,910
)
Payments for retirement of patronage capital
(57,328
)
(77,727
)
Net cash used in financing activities
(1,175,367
)
(730,498
)
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS
(195,592
)
446,832
BEGINNING CASH AND CASH EQUIVALENTS
418,514
140,307
ENDING CASH AND CASH EQUIVALENTS
$
222,922
$
587,139
See accompanying notes. |
* See Note 1 (f) |
|
7 |
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION |
|
CONSOLIDATED STATEMENTS OF CASH FLOWS |
(UNAUDITED) |
(in thousands) |
|
For the Six Months Ended November 30, 2005 and 2004 |
|
2005 | 2004 | |||||||
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: | ||||||||
Cash paid for interest | $ | 416,172 | $ | 457,907 | ||||
Non-cash financing and investing activities: | ||||||||
Patronage capital applied against loan balances | $ | 1,829 | $ | - | ||||
Minority interest patronage capital applied against loan balances | 1,689 | - | ||||||
See accompanying notes. |
|
8 |
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION | ||||
| ||||
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS | ||||
(UNAUDITED) | ||||
| ||||
(1) | General Information and Accounting Policies | |||
| ||||
(a) | General Information | |||
| ||||
National Rural Utilities Cooperative Finance Corporation ("CFC" or "the Company") was incorporated as a private, not-for-profit cooperative association under the laws of the District of Columbia in April 1969. The principal purpose of CFC is to provide its members with a source of financing to supplement the loan programs of the Rural Utilities Service ("RUS") of the United States Department of Agriculture. CFC makes loans primarily to its rural utility system members ("utility members") to enable them to acquire, construct and operate electric distribution, generation, transmission and related facilities. CFC also provides its members with credit enhancements in the form of letters of credit and guarantees of debt obligations. CFC is exempt from payment of federal income taxes under the provisions of Section 501(c)(4) of the Internal Revenue Code. CFC is a not-for-profit member-owned finance cooperative, thus its objective is not to maximize its net margins, but to offer its members the lowest cost financial products and services consistent with sound financial management. | ||||
| ||||
Rural Telephone Finance Cooperative ("RTFC") was incorporated as a private cooperative association in the state of South Dakota in September 1987 and was created for the purpose of providing and arranging financing for its rural telecommunications members and their affiliates. In February 2005, RTFC reincorporated in the District of Columbia. RTFC's results of operations and financial condition are consolidated with those of CFC in the accompanying financial statements. RTFC is headquartered with CFC in Herndon, Virginia. RTFC is a taxable entity and takes tax deductions for allocations of net margins as allowed by law under Subchapter T of the Internal Revenue Code. RTFC pays income tax based on its net margins, excluding net margins allocated to its members. | ||||
| ||||
National Cooperative Services Corporation ("NCSC") was incorporated in 1981 in the District of Columbia as a private cooperative association. NCSC provides financing to the for-profit and non-profit entities that are owned, operated or controlled by or provide substantial benefit to members of CFC. NCSC also markets, through its cooperative members, a consumer loan program for home improvements and an affinity credit card program. NCSC's membership consists of CFC and distribution systems that are members of CFC or are eligible for such membership. NCSC's results of operations and financial condition are consolidated with those of CFC in the accompanying financial statements. NCSC is headquartered with CFC in Herndon, Virginia. NCSC is a taxable corporation. NCSC pays income tax annually based on its net margins for the period. | ||||
| ||||
The Company's consolidated membership was 1,552 as of November 30, 2005 including 901 utility members, the majority of which are consumer-owned electric cooperatives, 513 telecommunications members, 69 service members and 69 associates in 49 states, the District of Columbia and two U.S. territories. The utility members included 830 distribution systems and 71 generation and transmission ("power supply") systems. Memberships among CFC, RTFC and NCSC have been eliminated in consolidation. All references to members within this document include members and associates. | ||||
| ||||
In the opinion of management, the accompanying consolidated financial statements contain all adjustments (which consist only of normal recurring accruals) necessary for a fair statement of the Company's results for the interim periods presented. Operating results for the six months ended November 30, 2005 are not necessarily indicative of the results that may be expected for the year ended May 31, 2006. | ||||
| ||||
During the quarter ended November 30, 2005, CFC recorded an adjustment to eliminate a reserve of $0.9 million related to the receipt of certain partnership distributions. The Company received the partnership distributions over various periods in fiscal years 2003, 2004 and 2005. The Company does not believe that the impact of the correction is material to the prior periods over which the $0.9 million of reserve was accumulated. The adjustment had no impact on cash flow for the quarter ended November 30, 2005. | ||||
The notes to the consolidated and combined financial statements for the years ended May 31, 2005 and 2004 should be read in conjunction with the accompanying financial statements. (See the Company's Form 10-K/A for the year ended May 31, 2005.) | ||||
9 | ||||
The preparation of financial statements in conformity with accounting principles generally accepted in the United States ("GAAP") requires management to make estimates and assumptions that affect the assets, liabilities, revenues and expenses reported in the financial statements, as well as amounts included in the notes thereto, including discussion and disclosure of contingent liabilities. While the Company uses its best estimates and judgments based on the known facts at the date of the financial statements, actual results could differ from these estimates as future events occur. | ||||
| ||||
The Company does not believe it is vulnerable to the risk of a near term severe impact as a result of any concentrations of its activities. | ||||
| ||||
(b) | Principles of Consolidation | |||
| ||||
The accompanying financial statements include the consolidated accounts of CFC, RTFC, NCSC and certain entities controlled by CFC created to hold foreclosed assets, after elimination of all material intercompany accounts and transactions. Prior to June 1, 2003, RTFC and NCSC were not consolidated with CFC since CFC has no direct financial ownership interest in either company; however RTFC's results of operations and financial condition were combined with those of CFC. Financial Accounting Standards Board ("FASB") Interpretation No. ("FIN") 46(R), Consolidation of Variable Interest Entities, an interpretation of Accounting Research Bulletin No. 51 requires CFC to consolidate the financial results of RTFC and NCSC. CFC is the primary beneficiary of variable interests in RTFC and NCSC due to its exposure to absorbing the majority of expected losses. | ||||
| ||||
CFC is the sole lender to and manages the affairs of RTFC through a long-term management agreement. Under a guarantee agreement, CFC has agreed to reimburse RTFC for loan losses. Six members of the CFC board serve as a lender advisory council to the RTFC board. All loans that require RTFC board approval also require the approval of the CFC lender advisory council. CFC is not a member of RTFC and does not elect directors to the RTFC board. RTFC is an associate of CFC. | ||||
| ||||
CFC is the primary source of funding to and manages the lending and financial affairs of NCSC through a management agreement which is automatically renewable on an annual basis unless terminated by either party. NCSC funds its programs either through loans from CFC or commercial paper and long-term notes issued by NCSC and guaranteed by CFC. In connection with these guarantees, NCSC must pay a guarantee fee and purchase from CFC interest-bearing subordinated term certificates in proportion to the related guarantee. Under a guarantee agreement, CFC has agreed to reimburse NCSC for losses on loans, excluding the consumer loan program. CFC does not control the election of directors to the NCSC board. NCSC is a class C member of CFC. | ||||
| ||||
RTFC and NCSC creditors have no recourse against CFC in the event of default by RTFC and NCSC, unless there is a guarantee agreement under which CFC has guaranteed NCSC and RTFC debt obligations to a third party. At November 30, 2005, CFC had guaranteed $249 million of NCSC debt with third parties. These guarantees are not included in Note 12 at November 30, 2005 as the debt that CFC had guaranteed is reported as debt of the Company. At November 30, 2005, CFC had no guarantees of RTFC debt to third party creditors. All CFC loans to RTFC and NCSC are secured by all assets and revenues of RTFC and NCSC. At November 30, 2005, RTFC had total assets of $2,511 million including loans outstanding to members of $2,269 million and NCSC had total assets of $488 million including loans outstanding of $447 million. At November 30, 2005 and May 31, 2005, CFC had committed to lend RTFC up to $10 billion, of which $2,266 million was outstanding at November 30, 2005. As of November 30, 2005 and May 31, 2005, CFC had committed to provide credit to NCSC of up to $2 billion. At November 30, 2005, CFC had provided a total of $478 million of credit to NCSC, representing $229 million of outstanding loans and $249 million of credit enhancements. | ||||
| ||||
CFC established limited liability corporations and partnerships to hold foreclosed assets. CFC has full ownership and control of all such companies and thus consolidates their financial results. CFC presents these companies in one line on the consolidated balance sheets and the consolidated statements of operations. | ||||
| ||||
Unless stated otherwise, references to the Company relate to the consolidation of CFC, RTFC, NCSC and certain entities controlled by CFC and created to hold foreclosed assets. | ||||
(c) | Operating Income | |||
| ||||
The majority of the Company's operating income relates to interest earned on loans to members that is recognized on an accrual basis, unless specified otherwise in Note 13. Operating income also includes other fees associated with the Company's | ||||
| ||||
10 |
loan and guarantee transactions. These fees, as well as the related recognition policy, are summarized below: | ||
* | Conversion fees may be charged when converting from one loan interest rate option to another. Conversion fees are deferred and recognized, using the straight-line method, which approximates the interest method, over the remaining term of the original loan interest rate pricing term, except for a small portion of the total fee charged to cover administrative costs related to the conversion which is recognized immediately. | |
* | Prepayment fees are charged for the early repayment of principal in full and are recognized when collected. | |
* | Late payment fees are charged on late loan payments and are recognized when collected. | |
* | Origination fees are charged only on RTFC loan commitments and in most cases are refundable on a prorata basis according to the amount of the loan commitment that is advanced. Such refundable fees are deferred and then recognized in full if the loan is not advanced prior to the expiration of the commitment. | |
* | Guarantee fees are charged based on the amount, type and term of the guarantee. Guarantee fees are deferred and amortized using the straight-line method, which approximates the interest method, into operating income over the life of the guarantee. | |
* | Commitment fees are charged on committed lines of credit. These fees are recognized when collected. | |
| ||
During the three months ended November 30, 2005 and 2004, the Company recognized fees totaling $5 million and $35 million, respectively, in operating income including $3 million and $4 million of conversion fees, respectively. Fees totaling $6 million and $4 million were deferred during the three months ended November 30, 2005 and 2004, respectively. No make-whole fees were earned by the Company during the three months ended November 30, 2005 as compared to $30 million in make-whole fees related to the prepayment of RTFC loans during the three months ended November 30, 2004. | ||
During the six months ended November 30, 2005 and 2004, the Company recognized fees totaling $14 million and $41 million, respectively, in operating income including $7 million and $9 million of conversion fees, respectively. Fees totaling $6 million were deferred during the six months ended November 30, 2005 and 2004. The Company earned $2 million in make-whole fees during the six months ended November 30, 2005 as compared to $30 million in make-whole fees related to the prepayment of RTFC loans during the six months ended November 30, 2004. | ||
| ||
(d) | Comprehensive Income | |
Comprehensive income includes the Company's net margin, as well as other comprehensive income related to derivatives. Comprehensive income for the three and six months ended November 30, 2005 and 2004 is as follows: |
For the three months ended November 30, | For the six months ended November 30, | |||||||||||||||
(in thousands) | 2005 | 2004 | 2005 | 2004 | ||||||||||||
Net margin | $ | 63,729 | $ | 38,966 | $ | 58,412 | $ | 128,907 | ||||||||
Other comprehensive income: | ||||||||||||||||
Unrealized gain (loss) on derivatives | 126 | 9,160 | (1,433 | ) | 9,399 | |||||||||||
Reclassification adjustment for | ||||||||||||||||
realized losses on derivatives | 39 | 11,285 | 259 | 14,821 | ||||||||||||
Comprehensive income | $ | 63,894 | $ | 59,411 | $ | 57,238 | $ | 153,127 |
(e) | Reclassifications | |
Certain reclassifications of prior period amounts have been made to conform to the current reporting format. |
(f) | Restatement | |
The Company has amended and restated its consolidated financial statements for the year ended May 31, 2005 and the quarter ended August 31, 2005. As part of the implementation of SFAS 133 on June 1, 2001, CFC recorded a transition adjustment related to the interest rate exchange agreements that did not qualify for hedge treatment. During the quarter ended November 2004, CFC fully or partially terminated seven interest rate exchange agreements that were in place on June 1, 2001, and therefore were included in the calculation of the transition adjustment. CFC fully or partially terminated these interest rate exchange agreements due to the prepayment of the loans for which the agreements were used as part of the loan funding. At the time the interest rate exchange agreements were fully or partially terminated, CFC should have written off the related unamortized transition adjustment. CFC did not write off the related transition adjustment, but rather continued to amortize the transition adjustment according to the original maturity schedule. CFC has increased the amount of transition adjustment amortization recorded in the derivative forward value line of the consolidated statement of operations by $8 million for the | ||
11 |
quarter and six months ended November 30, 2004. The increase to the amount of amortization recorded results in a decrease to operating margin and net margin in the same amount for the quarter and six months ended November 30, 2004. |
A summary of the significant effects of the restatement on the consolidated statement of operations for the quarter and six months ended November 30, 2004 is as follows. |
Six months ended November 30, 2004 |
|
|
|
|
| |||||||||
As previously reported | $ | 146,646 | $ | 81,458 | $ | 139,610 | $ | 138,767 | $ | 136,905 | ||||
Change in amortization of transition adjustment | (7,998 | ) | (7,998) |
|
(7,998
(7,998
)
(7,998
)
Restated
$
138,648
$
73,460
$
131,612
$
130,769
$
128,907
The following adjustments have been made to the restated consolidated statement of operations for the quarter ended November 30, 2004. |
Quarter ended November 30, 2004 |
|
|
|
|
| |||||||||
As previously reported | $ | 91,902 | $ | 1,276 | $ | 48,872 | $ | 48,224 | $ | 46,964 | ||||
Change in amortization of transition adjustment | (7,998 | ) | (7,998) |
| (7,998 | ) | (7,998 | ) | (7,998 | ) | ||||
Restated | $ | 83,904 | $ | (6,722) | $ | 40,874 | $ | 40,226 | $ | 38,966 |
In addition to the above restatement, the Company has also changed the presentation of operating expenses to make a separate presentation of rental and other income on the consolidated statements of operations. |
12 |
(2) | Loans and Commitments |
Loans outstanding to members and unadvanced commitments by loan type are summarized as follows: | |
November 30, 2005 | May 31, 2005 | |||||||||||||||
Loans | Unadvanced (1) | Loans | Unadvanced (1) | |||||||||||||
(in thousands) | outstanding | commitments | outstanding | commitments | ||||||||||||
Total by loan type: | ||||||||||||||||
Long-term fixed rate loans | $ | 13,877,498 | $ | - | $ | 12,724,758 | $ | - | ||||||||
Long-term variable rate loans | 3,041,008 | 6,020,827 | 4,961,397 | 5,537,121 | ||||||||||||
Loans guaranteed by RUS | 263,118 | 591 | 258,493 | 8,491 | ||||||||||||
Intermediate-term loans | 9,825 | 23,693 | 10,328 | 25,714 | ||||||||||||
Line of credit loans | 955,309 | 6,495,567 | 1,017,092 | 6,122,693 | ||||||||||||
Total loans | 18,146,758 | 12,540,678 | 18,972,068 | 11,694,019 | ||||||||||||
Less: Allowance for loan losses | (593,532 | ) |
-
(589,749
)
-
Net Loans
$
17,553,226
$
12,540,678
$
18,382,319
$
11,694,019
Total by segment:
CFC:
Distribution
$
12,783,425
$
8,837,280
$
12,728,866
$
8,821,217
Power supply
2,516,555
2,409,345
2,640,787
2,059,350
Statewide and associate
129,914
115,079
135,513
124,539
CFC Total
15,429,894
11,361,704
15,505,166
11,005,106
RTFC
2,269,500
521,702
2,992,192
518,514
NCSC
447,364
657,272
474,710
170,399
Total
$
18,146,758
$
12,540,678
$
18,972,068
$
11,694,019
The following table summarizes non-performing and restructured loans outstanding by segment and by loan program: |
November 30, 2005 | May 31, 2005 | |||||||||||||||
Loans | Unadvanced (1) | Loans | Unadvanced (1) | |||||||||||||
(in thousands) | outstanding | commitments | outstanding | commitments | ||||||||||||
Non-performing loans: | ||||||||||||||||
RTFC: | ||||||||||||||||
Long-term fixed rate loans | $ | 212,984 | $ | - | $ | 213,092 | $ | - | ||||||||
Long-term variable rate loans | 311,774 | - | 353,480 | - | ||||||||||||
Line of credit loans | 33,219 | 5,526 | 49,777 | 34,188 | ||||||||||||
Total RTFC loans | 557,977 | 5,526 | 616,349 | 34,188 | ||||||||||||
NCSC: |
|
|
|
| ||||||||||||
Long-term fixed rate loans | 128 | - | 277 | - | ||||||||||||
Total non-performing loans | $ | 558,105 | $ | 5,526 | $ | 616,626 | $ | 34,188 | ||||||||
|
|
|
| |||||||||||||
Restructured loans: |
|
|
|
| ||||||||||||
CFC: |
|
|
|
| ||||||||||||
Long-term variable rate loans | $ | 581,362 | $ | 200,000 | $ | 593,584 | $ | 200,000 | ||||||||
RTFC: |
|
|
|
| ||||||||||||
Long-term fixed rate loans | 7,069 | - | 7,342 | - | ||||||||||||
Total restructured loans | $ | 588,431 | $ | 200,000 | $ | 600,926 | $ | 200,000 |
| |
(1) Unadvanced commitments include loans for which loan contracts have been approved and executed, but funds have not been advanced. Additional information may be required to assure that all conditions for advance of funds have been fully met and that there has been no material change in the member's condition as represented in the supporting documents. Since commitments may expire without being fully drawn upon and a significant amount of the commitments are for standby liquidity purposes, the total unadvanced loan commitments do not necessarily represent future cash requirements. Collateral and security requirements for advances on commitments are identical to those on initial loan approval. As the interest rate on unadvanced commitments is not set, long-term unadvanced commitments have been classified in this chart as variable rate unadvanced commitments. However, once the loan contracts are executed and funds are advanced, the commitments could be at either a fixed or a variable rate. |
Loan origination costs are deferred and amortized using the straight-line method, which approximates the interest method, over the life of the loan as a reduction to operating income. At November 30, 2005 and May 31, 2005, the balance for deferred loan origination costs related to loans outstanding totaled $2 million. |
13 |
Pledging of Loans |
As of November 30, 2005 and May 31, 2005, CFC had pledged collateral totaling $7,668 million and $7,293 million, respectively, of distribution system mortgage notes related to outstanding long-term loans, $225 million and $218 million, respectively, of RUS guaranteed loans qualifying as permitted investments and $2 million of cash to secure its collateral trust bonds and long-term secured notes payable outstanding totaling $5,852 million and $5,402 million, respectively. |
Loan Security |
The Company evaluates each borrower's creditworthiness on a case-by-case basis. It is generally the Company's policy to require collateral for long-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 and debt service coverage ratios, maintenance of adequate insurance coverage as well as certain other restrictive covenants. |
The following tables summarize the Company's secured and unsecured loans outstanding by loan program and by segment. |
(Dollar amounts in thousands) | At November 30, 2005 | At May 31, 2005 | |||||||||||||||||||
Total by loan program: | Secured | % | Unsecured | % | Secured | % | Unsecured | % | |||||||||||||
Long-term fixed rate loans | $ | 13,415,402 | 97% |
| $ | 462,096 | 3% | $ | 12,293,054 | 97% | $ | 431,704 | 3% | ||||||||
Long-term variable rate loans | 2,907,164 | 96% | 133,844 | 4% | 4,701,660 | 95% | 259,737 | 5% | |||||||||||||
Loans guaranteed by RUS | 263,118 | 100% | - | - | 258,493 | 100% | - | - | |||||||||||||
lntermediate-term loans | 967 | 10% | 8,858 | 90% | 1,235 | 12% | 9,093 | 88% | |||||||||||||
Line of credit loans | 151,853 | 16% | 803,456 | 84% | 201,466 | 20% | 815,626 | 80% | |||||||||||||
Total loans | $ | 16,738,504 | 92% | $ | 1,408,254 | 8% | $ | 17,455,908 | 92% | $ | 1,516,160 | 8% |
Total by segment: | |||||||||||||||||||||
CFC | $ | 14,344,954 | 93% |
| $ | 1,084,940 | 7% | $ | 14,316,925 | 92% | $ | 1,188,241 | 8% | ||||||||
RTFC | 2,023,322 | 89% | 246,178 | 11% | 2,747,845 | 92% | 244,347 | 8% | |||||||||||||
NCSC | 370,228 | 83% | 77,136 | 17% | 391,138 | 82% | 83,572 | 18% | |||||||||||||
Total loans | $ | 16,738,504 | 92% | $ | 1,408,254 | 8% | $ | 17,455,908 | 92% | $ | 1,516,160 | 8% |
(3) | Allowance for Loan Losses |
The Company maintains an allowance for loan losses at a level management considers to be adequate in relation to the credit quality, tenor, forecasted default, estimated recovery rates and amount of its loan portfolio. On a quarterly basis, the Company prepares an analysis of the adequacy of the loan loss allowance and makes adjustments to the allowance as necessary. The allowance is based on estimates and, accordingly, actual loan losses may differ from the allowance amount. |
Activity in the allowance account is summarized below for the six months ended November 30, 2005 and 2004 and the year ended May 31, 2005. |
For the six months ended November, | Year ended May 31, | |||||||||||
(in thousands) | 2005 | 2004 | 2005 | |||||||||
Balance at beginning of year | $ | 589,749 | $ | 573,939 | $ | 573,939 | ||||||
Provision for loan losses | 3,886 | - | 16,402 | |||||||||
Write-offs | (442 | ) | (600 | ) | (1,354 | ) | ||||||
Recoveries | 339 | 404 | 762 | |||||||||
Balance at end of period | $ | 593,532 | $ | 573,743 | $ | 589,749 |
(4) | Foreclosed Assets |
Assets received in satisfaction of loan receivables are recorded at the lower of cost or market and identified on the consolidated balance sheets as foreclosed assets. During fiscal year 2003, CFC received assets with a fair value totaling $369 million primarily comprised of real estate developer notes receivable, limited partnership interests in certain real estate developments and partnership interests in real estate properties, as well as telecommunications assets as part of the bankruptcy settlement with Denton County Electric Cooperative, d/b/a CoServ Electric ("CoServ"). CFC operated the real estate assets before the assets were sold in August 2005 for $30 million. The results of operations of foreclosed assets during the six months ended November 30, 2005 include a gain of $4 million from the sale. CFC will continue to service the notes receivable until the earlier of sale or maturity. | |
| |
14 |
The activity for foreclosed assets is summarized below for the six months ended November 30, 2005 and the year ended May 31, 2005. |
Six months ended | Year ended | |||||||
(in thousands) | November 30, 2005 | May 31, 2005 | ||||||
Beginning balance | $ | 140,950 | $ | 247,660 | ||||
Results of operations | 8,570 | 13,079 | ||||||
Net cash withdrawn | (1,348 | ) | (116,134 | ) | ||||
Impairment to fair value write down | - | (55 | ) | |||||
Net proceeds from sale of foreclosed assets | (28,782 | ) | (3,600 | ) | ||||
Ending balance of foreclosed assets | $ | 119,390 | $ | 140,950 | ||||
Related to the foreclosed assets were funding costs totaling $3 million for the six months ended November 30, 2005 and 2004 which are reported in the cost of funds in the consolidated statements of operations. |
(5) | Short-Term Debt and Credit Arrangements |
The following is a summary of short-term debt at November 30, 2005 and May 31, 2005: | |
(in thousands) | November 30, 2005 | May 31, 2005 | ||||||
Short-term debt: | ||||||||
Commercial paper sold through dealers, net of discounts | $ | 598,367 | $ | 2,873,167 | ||||
Commercial paper sold directly to members, at par | 1,137,870 | 989,250 | ||||||
Commercial paper sold directly to non-members, at par | 140,363 | 127,920 | ||||||
Total commercial paper | 1,876,600 | 3,990,337 | ||||||
Daily liquidity fund | 345,658 | 270,868 | ||||||
Bank bid notes | 100,000 | 100,000 | ||||||
Subtotal short-term debt | 2,322,258 | 4,361,205 | ||||||
|
| |||||||
Long-term debt maturing within one year: |
|
| ||||||
Medium-term notes (1) | 1,362,578 | 1,086,593 | ||||||
Foreign currency valuation account (1) | 54,268 | 40,425 | ||||||
Secured collateral trust bonds | 2,499,322 | 2,448,530 | ||||||
Long-term notes payable | 15,685 | 15,826 | ||||||
Total long-term debt maturing within one year | 3,931,853 | 3,591,374 | ||||||
|
| |||||||
Short-term debt supported by revolving credit |
|
| ||||||
agreements, classified as long-term debt (see Note 6) | (3,760,000 | ) | (5,000,000 | ) | ||||
Total short-term debt | $ | 2,494,111 | $ | 2,952,579 |
| |
(1) At November 30, 2005 and May 31, 2005, medium-term notes includes $390 million of medium-term notes denominated in Euros and $282 million and zero, respectively of medium-term notes denominated in Australian dollars. The foreign currency valuation account represents the change in the dollar value of foreign denominated debt due to changes in currency exchange rates from the date the debt was issued to the reporting date as required under SFAS 52. |
CFC issues commercial paper for periods of one to 270 days. CFC also enters into short-term bank bid note agreements, which are unsecured obligations of CFC and do not require backup bank lines for liquidity purposes. Bank bid note facilities are uncommitted lines of credit for which CFC does not pay a fee. The commitments are generally subject to termination at the discretion of the individual banks. |
Foreign Denominated Short-Term Debt |
Included in short-term debt at November 30, 2005 and May 31, 2005 are medium-term notes due within one year that are denominated in a foreign currency. At the time of issuance of short-term debt denominated in a foreign currency, CFC enters into a cross currency or cross currency interest rate exchange agreement to fix the exchange rate on all principal and interest payments through maturity. The foreign denominated short-term debt is revalued at each reporting date based on the current exchange rate. To the extent that the current exchange rate is different than the exchange rate at the time of issuance, there will be a change in the value of the foreign denominated short-term debt. The adjustment to the value of the short-term debt on the consolidated balance sheets is also reported on the consolidated statements of operations as foreign currency adjustments. As a result of entering cross currency and cross currency interest rate exchange agreements, the adjusted short-term debt value at the reporting date does not represent the amount that CFC will ultimately pay to retire the short-term debt, unless the counterparty to the exchange agreement does not perform as required under the agreement. |
15 |
Revolving Credit Agreements |
The following is a summary of the Company's revolving credit agreements at November 30, 2005 and May 31, 2005: |
(Dollar amount in thousands) | November 30, | May 31, | Termination Date | Facility fee per annum (1) | ||||||||||
Three-year agreement | $ | 500,000 | $ | 1,740,000 | March 30, 2007 | 0.10 of 1% | ||||||||
Five-year agreement | 1,975,000 | 1,975,000 | March 23, 2010 | 0.09 of 1% | ||||||||||
364-day agreement (2) | 1,285,000 | 1,285,000 | March 22, 2006 | 0.07 of 1% | ||||||||||
Total | $ | 3,760,000 | $ | 5,000,000 |
(1) Facility fee determined by CFC's senior unsecured credit ratings based on the pricing schedules put in place at the initiation of the related agreement. | |
(2) Any amount outstanding under these agreements may be converted to a one-year term loan at the end of the revolving credit periods. For the agreement in place at November 30, 2005 and May 31, 2005, if converted to a term loan, the fee on the outstanding principal amount of the term loan is 0.125 of 1% per annum. |
Effective October 7, 2005, the Company elected to reduce the amount of the three-year agreement by $1,240 million due to the Company's reduced usage of commercial paper and other short-term instruments and exposure related to guarantees. Since the initiation of the revolving credit agreements, the Company has obtained access to additional funding sources which do not require backup liquidity. In addition, CFC and RTFC have had members reduce the size of their loans outstanding through refinancings. | |
| |
Up-front fees of between 0.03 and 0.13 of 1% were paid to the banks based on their commitment level in each of the agreements in place at November 30, 2005 and May 31, 2005, totaling in aggregate $3 million, which will be amortized as expense over the life of the agreements. Each agreement contains a provision under which if borrowings exceed 50% of total commitments, a utilization fee must be paid on the outstanding balance. The utilization fee is 0.10 of 1% for the 364-day and five-year agreements and 0.15 of 1% for the three-year agreement outstanding at November 30, 2005 and May 31, 2005. | |
Effective November 30, 2005 and May 31, 2005, the Company was in compliance with all covenants and conditions under its revolving credit agreements in place at that time and there were no borrowings outstanding under such agreements. | |
| |
For the purpose of calculating the required financial covenants contained in its revolving credit agreements, the Company adjusts net margin, senior debt and total equity to exclude the non-cash adjustments related to SFAS 133 and 52. Adjusted times interest earned ratio ("TIER") represents the cost of funds adjusted to include the derivative cash settlements, plus minority interest net margin, plus net margin prior to the cumulative effect of change in accounting principle and dividing that total by the cost of funds adjusted to include the derivative cash settlements. Senior debt represents the sum of subordinated deferrable debt, members' subordinated certificates, minority interest and total equity. Senior debt includes guarantees; however, it excludes: | |
* | guarantees for members where the long-term unsecured debt of the member is rated at least BBB+ by Standard & Poor's Corporation or Baa1 by Moody's Investors Service; |
* | indebtedness incurred to fund RUS guaranteed loans; and |
* | the payment of principal and interest by the member on the guaranteed indebtedness if covered by insurance or reinsurance provided by an insurer having an insurance financial strength rating of AAA by Standard & Poor's Corporation or a financial strength rating of Aaa by Moody's Investors Service. |
| |
The following represents the Company's required financial ratios under the revolving credit agreements at or for the six months ended November 30, 2005 and the year ended May 31, 2005: | |
Requirement | November 30, 2005 | May 31, 2005 | ||||||
Minimum average adjusted TIER over the six most recent fiscal quarters | 1.025 | 1.12 | 1.08 | |||||
Minimum adjusted TIER at fiscal year end (1) | 1.05 | N/A | 1.14 | |||||
Maximum senior debt as a percentage of total equity | 10.00 | 6.03 | 6.30 | |||||
|
|
|
|
|
|
|
|
|
(1) | The Company must meet this requirement in order to retire patronage capital. |
The revolving credit agreements do not contain a material adverse change clause or ratings triggers that limit the banks' obligations to fund under the terms of the agreements, but CFC must be in compliance with their other requirements, including financial ratios, in order to draw down on the facilities. |
Based on the ability to borrow under the bank line facilities, the Company classified $3,760 million and $5,000 million, respectively, of its short-term debt outstanding as long-term debt at November 30, 2005 and May 31, 2005. The Company expects to maintain |
16 |
more than $3,760 million of short-term debt outstanding during the next twelve months. If necessary, the Company can refinance such short-term debt on a long-term basis by borrowing under the credit agreements totaling $3,760 million discussed above, subject to the conditions therein. |
(6) | Long-Term Debt |
The following is a summary of long-term debt at November 30, 2005 and May 31, 2005: |
(in thousands) | November 30, 2005 | May 31, 2005 | ||||||
Unsecured long-term debt: | ||||||||
Medium-term notes, sold through dealers (1) (3) | $ | 5,143,140 | $ | 5,387,082 | ||||
Medium-term notes, sold directly to members (2) | 52,129 | 68,382 | ||||||
Subtotal | 5,195,269 | 5,455,464 | ||||||
Unamortized discount | (10,564 | ) | (11,330 | ) | ||||
Foreign currency valuation account (3) | 156,050 | 220,553 | ||||||
Total unsecured medium-term notes | 5,340,755 | 5,664,687 | ||||||
|
| |||||||
Unsecured long-term notes payable | 83,770 | 91,124 | ||||||
Total unsecured long-term debt | 5,424,525 | 5,755,811 | ||||||
|
| |||||||
Secured long-term debt: |
|
| ||||||
Secured collateral trust bonds | 2,851,981 | 2,952,024 | ||||||
Unamortized discount | (5,213 | ) | (5,880 | ) | ||||
Total secured collateral trust bonds | 2,846,768 | 2,946,144 | ||||||
|
| |||||||
Secured long-term notes payable | 1,000,000 | - | ||||||
Total secured long-term debt | 3,846,768 | 2,946,144 | ||||||
|
| |||||||
Short-term debt supported by revolving credit |
|
| ||||||
agreements, classified as long-term debt (see Note 5) | 3,760,000 | 5,000,000 | ||||||
Total long-term debt | $ | 13,031,293 | $ | 13,701,955 |
(1) | Medium-term notes sold through dealers mature through 2032 as of November 30, 2005 and May 31, 2005. Does not include $1,187 million and $921 million of medium-term notes sold through dealers that were reclassified as short-term debt at November 30, 2005 and May 31, 2005, respectively. |
(2) | Medium-term notes sold directly to members mature through 2023 as of November 30, 2005 and May 31, 2005. Does not include $230 million and $206 million of medium-term notes sold to members that were reclassified as short-term debt at November 30, 2005 and May 31, 2005, respectively. |
(3) | At November 30, 2005 and May 31, 2005, medium-term notes sold through dealers includes $434 million related to medium-term notes denominated in Euros and zero and $282 million, respectively, of medium-term notes denominated in Australian dollars. The foreign currency valuation account represents the change in the dollar value of foreign denominated debt due to changes in currency exchange rates from the date the debt was issued to the reporting date as required under SFAS 52. |
Secured Long-Term Notes Payable |
In July 2005, the Company sold $500 million of 4.656% notes to Farmer Mac due in 2008 and secured the debt issuance by the pledge of CFC mortgage notes. During the six months ended November 30, 2005, CFC received advances totaling $500 million of a $1 billion loan facility under a bond purchase agreement with the Federal Financing Bank ("FFB") and a bond guarantee agreement with RUS as part of the Rural Economic Development Loan and Grant ("REDLG") program. Under this program, CFC is eligible to borrow up to the amount of the outstanding loans that it has issued concurrent with RUS loans. At November 30, 2005, CFC had a total of $2.6 billion outstanding on loans issued concurrently with RUS. Under the program, CFC will pay a fee of 30 basis points per annum to RUS for the guarantee of principal and interest payments to FFB. |
Foreign Denominated Long-Term Debt |
Included in long-term debt at November 30, 2005 and May 31, 2005 are medium-term notes that are denominated in a foreign currency. At the time of issuance for medium-term notes denominated in a foreign currency, CFC enters into a cross currency or cross currency interest rate exchange agreement to fix the exchange rate on all principal and interest payments through maturity. The foreign denominated long-term debt is revalued at each reporting date based on the current exchange rate. To the extent that the current exchange rate is different than the exchange rate at the time of issuance, there will be a change in the value of the foreign denominated long-term debt. The adjustment to the value of the long-term debt on the consolidated balance sheets is also reported on the consolidated statements of operations as foreign currency adjustments. As a result of entering cross currency and cross currency interest rate exchange agreements, the adjusted long-term debt value at the reporting date does not represent the amount that CFC will ultimately pay to retire the long-term debt, unless the counterparty to the exchange agreement does not perform as required under the agreement. |
Rating Triggers |
Included in secured long-term notes payable at November 30, 2005 are $500 million of bonds outstanding under the REDLG program that include a rating trigger event. At the occurrence of a rating trigger event, the Company is required to pledge collateral comprised of electric or telephone mortgage notes at least equal to the principal amount of REDLG bonds outstanding. The |
|
17 |
Company's rating triggers are based on its senior secured credit rating from Standard & Poor's Corporation, Moody's Investors Service and Fitch Ratings (see chart on page 58). A rating trigger event exists if the Company's senior secured debt does not have at least two of the following ratings: (i) A- or higher from Standard & Poor's Corporation, (ii) A3 or higher from Moody's Investors Service, (iii) A- or higher from Fitch Ratings and (iv) an equivalent rating from a successor rating agency to any of the above rating agencies. |
(7) | Subordinated Deferrable Debt |
The following table is a summary of subordinated deferrable debt outstanding at November 30, 2005 and May 31, 2005: |
(Dollar amounts in thousands) | November 30, 2005 | May 31, 2005 | ||||||
6.75% due 2043 | $ | 125,000 | $ | 125,000 | ||||
6.10% due 2044 | 100,000 | 100,000 | ||||||
5.95% due 2045 | 135,000 | 135,000 | ||||||
7.625% due 2050 | 150,000 | 150,000 | ||||||
7.40% due 2050 | 175,000 | 175,000 | ||||||
Total | $ | 685,000 | $ | 685,000 |
(8) | Derivative Financial Instruments |
The Company is neither a dealer nor a trader in derivative financial instruments. The Company uses interest rate, cross currency and cross currency interest rate exchange agreements to manage its interest rate risk and foreign exchange risk. | |
In accordance with SFAS 133, as amended, the Company records derivative instruments on the consolidated balance sheet as either an asset or liability measured at fair value. Changes in the fair value of derivative instruments are recognized in the derivative forward value line item of the consolidated statement of operations unless specific hedge accounting criteria are met. The change to the fair value is recorded to other comprehensive income if the hedge accounting criteria are met. In the case of certain foreign currency exchange agreements that meet hedge accounting criteria, the change in fair value is recorded to other comprehensive income and then reclassified to offset the related change in the dollar value of foreign denominated debt in the consolidated statement of operations. The Company formally documents, designates, and assesses the effectiveness of transactions that receive hedge accounting. | |
| |
Net settlements paid and received for derivative instruments that qualify for hedge accounting are recorded in the cost of funds. Net settlements related to derivative instruments that do not qualify for hedge accounting are recorded as derivative cash settlements. | |
| |
Interest Rate Exchange Agreements | |
At November 30, 2005 and May 31, 2005, the Company was a party to interest rate exchange agreements with notional amounts totaling $14,622 million and $13,693 million, respectively. The Company uses interest rate exchange agreements as part of its overall interest rate matching strategy. Interest rate exchange agreements are used when they provide a lower cost of funding or minimize interest rate risk. The Company has not invested in derivative financial instruments for trading purposes in the past and does not anticipate doing so in the future. The Company's interest rate exchange agreements at November 30, 2005 have maturity dates ranging from 2006 to 2035. | |
| |
Generally, the Company's interest rate exchange agreements do not qualify for hedge accounting under SFAS 133. The majority of the Company's interest rate exchange agreements use a 30-day composite commercial paper index as either the pay or receive leg. The 30-day composite commercial paper index is the best match for the commercial paper that is the underlying debt and is also used as the cost basis in the Company's variable interest rates. However, the correlation between movement in the 30-day composite commercial paper index and movement in the Company's commercial paper rates is not consistently high enough to qualify for hedge accounting. | |
| |
In interest rate exchange agreements in which the Company receives a fixed rate, the fixed rate is equal to the rate on the underlying debt, and the rate that the Company pays is tied to the rate earned on the asset funded. In interest rate exchange agreements in which the Company receives a variable rate, the variable rate is tied to the same index as the variable rate the Company pays on the underlying debt and the rate that the Company pays is tied to the rate earned on the asset funded. However, when the Company uses its commercial paper as the underlying debt, the receive leg of the interest rate exchange agreement is based on the 30-day composite commercial paper index. Commercial paper rates are not indexed to the 30-day composite commercial paper index and the Company does not solely issue its commercial paper with maturities of 30 days. The Company uses the 30-day composite commercial paper index as the pay leg in these interest rate exchange agreements because it is the market index that best correlates with its own commercial paper. | |
| |
18 |
* | Interest rate exchange agreements that are not designated as and do not qualify as hedges. |
During the six months ended November 30, 2005 and 2004, income related to interest rate exchange agreements that did not qualify for hedge accounting totaling $32 million and $2 million during the six months ended November 30, 2005 and 2004, respectively was recorded as derivative cash settlements in the consolidated statements of operations. Cash settlements includes income of $31 million and $25 million during the six months ended November 30, 2005 and 2004, respectively, related to the periodic amounts that were paid and received on its interest rate exchange agreements. During the six months ended November 30, 2005 and 2004, respectively, cash settlements also includes $1 million of fees received from and $23 million of fees paid to counterparties related to the exiting of agreements. These agreements were terminated due to the prepayment of approximately $614 million and $900 million of loans during the six months ended November 30, 2005 and 2004, respectively, the proceeds of which were used to pay down the underlying debt for the terminated interest rate exchange agreements. The impact on earnings for the six months ended November 30, 2005 and 2004 due to the change in fair value of these interest rate exchange agreements was a loss of $5 million and a gain of $44 million, respectively, recorded as part of the derivative forward value in the consolidated statements of operations. For the six months ended November 30, 2005 and 2004, the derivative forward value also includes amortization of $0.3 million and $15 million (including $8 million related to the early termination of interest rate exchange agreements), respectively, related to the transition adjustment recorded as an other comprehensive loss on June 1, 2001, the date the Company implemented SFAS 133. The transition adjustment will be amortized into earnings over the remaining life of the related interest rate exchange agreements. Less than $1 million is expected to be amortized over the next twelve months related to the transition adjustment and will continue through April 2029. | |
At November 30, 2005 and May 31, 2005, interest rate exchange agreements with a total notional amount of $7,122 million and $6,443 million, respectively, in which the Company pays a fixed rate and receives a variable rate based on a 30-day composite commercial paper index or a LIBOR based rate, were used to synthetically change the rate on debt used to fund long-term fixed rate loans from a variable rate to a fixed rate. | |
At November 30, 2005 and May 31, 2005, interest rate exchange agreements with a total notional amount of $7,300 million and $7,050 million, respectively, in which the Company pays a variable rate based on a 30-day composite commercial paper index or a LIBOR based rate and receives a fixed rate, were used to synthetically change the rate on debt from fixed to variable. | |
* | Interest rate exchange agreements that are designated as and qualify as hedges. |
At November 30, 2005 and May 31, 2005, interest rate exchange agreements with a total notional amount of $200 million in which the Company pays a fixed rate and receives a variable rate based on a LIBOR based rate were used to synthetically change the rate on debt used to fund long-term fixed rate loans from a variable rate to a fixed rate. These agreements are designated as and qualify as effective cash flow hedges. Effectiveness is assessed by comparing the critical terms of the interest rate exchange agreements to the critical terms of the hedged debt. Interest rate exchange agreements that qualify as effective cash flow hedges are deemed to be effective if the payment dates match exactly to the payment dates on the hedged debt throughout the terms of the agreements. All effective changes in forward value on these interest rate exchange agreements are recorded as other comprehensive income and reported in the consolidated statement of changes in equity. The net impact was other comprehensive loss of $1 million and other comprehensive income of $0.1 million, respectively for the six months ended November 30, 2005 and 2004. No amount related to ineffectiveness was recorded in the consolidated statement of operations for the six months ended November 30, 2005 and 2004. For the six months ended November 30, 2005 and 2004, cost of funds includes expense of $4 million and $1 million, respectively related to net cash settlements for interest rate exchange agreements that qualify as effective hedges. | |
Cross Currency and Cross Currency Interest Rate Exchange Agreements | |
At November 30, 2005 and May 31, 2005, the Company had medium-term notes outstanding that are denominated in foreign currencies. The Company entered into cross currency and cross currency interest rate exchange agreements related to each foreign denominated issue in order to synthetically change the foreign denominated debt to U.S. dollar denominated debt. At November 30, 2005 and May 31, 2005, the Company was a party to cross currency and cross currency interest rate exchange agreements with a total notional amount of $1,106 million. | |
* | Cross currency interest rate exchange agreements that are not designated as and do not qualify as hedges. |
At November 30, 2005 and May 31, 2005, cross currency interest rate exchange agreements with a total notional amount of $434 million, in which the Company receives Euros and pays U.S. dollars, and $282 million, in which the Company receives Australian dollars and pays U.S. dollars, were used to synthetically change the foreign denominated debt to U.S. dollar denominated debt. In addition, the agreements synthetically change the interest rate from the fixed rate on the foreign denominated debt to variable rate U.S. denominated debt or from a variable rate on the foreign denominated debt to a different variable rate. These cross currency interest rate exchange agreements do not qualify for hedge accounting. | |
19 |
Since the agreements synthetically change both the interest rate and the currency exchange rate in one agreement, the criteria to qualify for effectiveness specifies that the change in fair value of the debt when divided by the change in the fair value of the derivative must be within a range of 80% to 125%, which is more difficult to obtain than matching the critical terms. Therefore, all changes in fair value are recorded in the consolidated statements of operations. The impact on earnings for the six months ended November 30, 2005 and 2004 due to the change in fair value of these cross currency interest rate exchange agreements was a loss of $46 million and a gain of $95 million, respectively, recorded in the derivative forward value. The amounts paid and received related to cross currency interest rate exchange agreements that did not qualify for hedge accounting were income of $5 million and $12 million, respectively, for the six months ended November 30, 2005 and 2004 and were included as part of derivative cash settlements. | |
* | Cross currency exchange agreements that are designated as and qualify as hedges. |
At November 30, 2005 and May 31, 2005, cross currency exchange agreements with a total notional amount of $390 million in which the Company receives Euros and pays U.S. dollars are designated as and qualify as effective cash flow hedges. Effectiveness is assessed by comparing the critical terms of the cross currency exchange agreements to the critical terms of the hedged debt. Cross currency exchange agreements that qualify as effective cash flow hedges are deemed to be effective if the payment dates match exactly to the payment dates on the hedged debt throughout the terms of the agreements. All effective changes in forward value on these cross currency exchange agreements are recorded as other comprehensive income and reported in the consolidated statement of changes in equity. Reclassifications are then made from other comprehensive income to foreign currency adjustments on the consolidated statements of operations in an amount equal to the change in the dollar value of foreign denominated debt, which results in the full offset of the change in the dollar value of such debt based on the changes in the exchange rate during the period. There was no change to other comprehensive income for the six months ended November 30, 2005 compared to a gain of $9 million for the six months ended November 30, 2004. No amount related to ineffectiveness was recorded in the consolidated statement of operations for the six months ended November 30, 2005 and 2004. Cost of funds includes income of $2 million and expense of $4 million related to net cash settlements for cross currency exchange agreements that qualify as effective hedges for the six months ended November 30, 2005 and 2004, respectively. |
The following chart summarizes the cross currency and cross currency interest rate exchange agreements outstanding at November 30, 2005 and May 31, 2005. |
(Currency amounts in thousands) | Notional Principal Amount | |||||||||||||||||||||||||||
Original | U.S. Dollars (4) | Foreign Currency | ||||||||||||||||||||||||||
Exchange | November 30, | May 31, | November 30, | May 31, | ||||||||||||||||||||||||
Maturity Date | Rate | 2005 | 2005 | 2005 | 2005 | |||||||||||||||||||||||
February 24, 2006 | 0.8969 | $ | 390,250 | $ | 390,250 | 350,000 | EU (1) | 350,000 | EU (1) | |||||||||||||||||||
July 7, 2006 | 1.506 | 282,200 | (3) | 282,200 | (3) | 425,000 | AUD (2) | 425,000 | AUD (2) | |||||||||||||||||||
March 14, 2007 | 1.153 | 433,500 | (3) | 433,500 | (3) | 500,000 | EU (1) | 500,000 | EU (1) |
(1) EU - Euros | |
(2) AUD - Australian dollars | |
(3) These agreements also change the interest rate from a foreign denominated fixed rate to a U.S. dollar denominated variable rate or from a foreign denominated variable rate to a U.S. dollar denominated variable rate. | |
(4) Amounts in the chart represent the U.S. dollar value at the initiation of the exchange agreement. At November 30, 2005 and May 31, 2005, one U. S. dollar was the equivalent of 0.848 and 0.813 Euros, respectively. One U.S. dollar was the equivalent of 1.353 and 1.324 Australian dollars at November 30, 2005 and May 31, 2005, respectively. |
Generally, the Company's cross currency interest rate exchange agreements in which the interest rate is moved from fixed to floating or from one floating index to another floating index do not qualify for hedge accounting |
|
The Company entered into these exchange agreements to sell the amount of foreign currency received from the investor for U.S. dollars on the issuance date and to buy the amount of foreign currency required to repay the investor principal and interest due through or on the maturity date. By locking in the exchange rates at the time of issuance, the Company has eliminated the possibility of any currency gain or loss (except in the case of the Company or a counterparty default or unwind of the transaction), which might otherwise have been produced by the foreign currency borrowing. |
On foreign currency denominated medium-term notes with maturities longer than one year, interest is paid annually and on medium-term notes with maturities of less than one year, interest is paid at maturity. The Company considers the cost of all related cross currency interest rate exchange agreements as part of the total cost of debt issuance when deciding whether to issue debt in the U.S. or foreign capital markets and whether to issue the debt denominated in U.S. dollars or foreign currencies. |
|
Either counterparty to the cross currency and cross currency interest rate exchange agreements may terminate the agreement due to specified events, primarily a credit downgrade. If either counterparty terminates the agreement, a payment may be due from one counterparty to the other based on the fair value of the underlying derivative instrument which would result in a gain or |
|
20 |
loss. The Company is exposed to counterparty credit risk and foreign currency risk on the cross currency and cross currency interest rate exchange agreements if the counterparty to the agreement does not perform pursuant to the agreement's terms. The Company only enters into cross currency and cross currency interest rate exchange agreements with financial institutions with investment grade ratings. | |
| |
Rating Triggers | |
The Company has interest rate, cross currency, and cross currency interest rate exchange agreements that contain a condition that will allow one counterparty to terminate the agreement if the credit rating of the other counterparty drops to a certain level. This condition is commonly called a rating trigger. Under the rating trigger, if the credit rating for either counterparty falls to the level specified in the agreement, the other counterparty may, but is not obligated to, terminate the agreement. If either counterparty terminates the agreement, a net payment may be due from one counterparty to the other based on the fair value of the underlying derivative instrument. Rating triggers are not separate financial instruments and are not separate derivatives under SFAS 133. The Company's rating triggers are based on its senior unsecured credit rating from Standard & Poor's Corporation and Moody's Investors Service (see chart on page 58). At November 30, 2005, there were rating triggers associated with $11,445 million notional amount of interest rate, cross currency and cross currency interest rate exchange agreements. If the Company's rating from Moody's Investors Service falls to Baa1 or the Company's rating from Standard & Poor's Corporation falls to BBB+, the counterparties may terminate agreements with a total notional amount of $1,276 million. If the Company's rating from Moody's Investors Service falls below Baa1 or the Company's rating from Standard & Poor's Corporation falls below BBB+, the counterparties may terminate the agreements on the remaining total notional amount of $10,169 million. | |
| |
At November 30, 2005, the Company's exchange agreements had a derivative fair value of $39 million, comprised of $40 million that would be due to the Company and $1 million that the Company would have to pay if all interest rate, cross currency and cross currency interest rate exchange agreements with a rating trigger at the level of BBB+ or Baa1 and above were to be terminated, and a derivative fair value of $252 million, comprised of $304 million that would be due to the Company and $52 million that the Company would have to pay if all interest rate, cross currency and cross currency interest rate exchange agreements with a rating trigger below the level of BBB+ or Baa1 were to be terminated. | |
| |
(9) | Members' Subordinated Certificates |
CFC's members are required to purchase membership certificates as a condition of membership. Such certificates are interest-bearing unsecured, subordinated debt of CFC. New members are required to purchase membership certificates based on an amount calculated as a percentage of the difference between revenue and the cost of power for a period of 15 years. New members purchase the certificates over time as a percentage of the amount they borrow from CFC. RTFC and NCSC members are not required to purchase membership certificates as a condition of membership. CFC membership certificates typically have an original maturity of 100 years and pay interest at 5%. The weighted average maturity for all membership subordinated certificates outstanding at November 30, 2005 and May 31, 2005 was 71 years. | |
Members obtaining long-term loans, certain intermediate-term loans or guarantees are generally required to purchase additional loan or guarantee subordinated certificates with each such loan or guarantee based on the members' CFC debt to equity ratio. These certificates are unsecured, subordinated debt of the Company. | |
Certificates currently purchased in conjunction with long-term loans are generally non-interest bearing. CFC's policy regarding the purchase of loan subordinated certificates requires members with a CFC debt to equity ratio in excess of the limit in the policy to purchase a non-amortizing/non-interest bearing subordinated certificate in the amount of 2% for distribution systems and 7% for power supply systems. CFC associates and RTFC members are required to purchase loan subordinated certificates of 10% of each long-term loan advance. For non-standard credit facilities, the borrower is required to purchase interest bearing certificates in amounts determined appropriate by CFC based on the circumstances of the transaction. | |
The maturity dates and the interest rates payable on guarantee subordinated certificates purchased in conjunction with CFC's guarantee program vary in accordance with applicable CFC policy. Members may be required to purchase noninterest-bearing debt service reserve subordinated certificates in connection with CFC's guarantee of long-term tax-exempt bonds (see Note 12). CFC pledges proceeds from the sale of such certificates to the debt service reserve fund established in connection with the bond issue and any earnings from the investments of the fund inure solely to the benefit of the members for whom the bonds are issued. These certificates have varying maturities not exceeding the longest maturity of the guaranteed obligation. | |
| |
(10) | Minority Interest |
At November 30, 2005 and May 31, 2005, the Company reported minority interests of $21 million and $19 million, respectively, on the consolidated balance sheets. Minority interest represents the interest of other parties in RTFC and NCSC. The members of | |
| |
21 |
RTFC and NCSC own or control 100% of the interest in the respective company. CFC implemented FIN 46(R) on June 1, 2003 which required the consolidation of RTFC's and NCSC's results of operations and financial condition even though CFC has no financial interest or voting control over either company. | |
During the six months ended November 30, 2005, the balance of minority interest increased by $4 million of minority interest net margin for the six months ended November 30, 2005 less the offset of $2 million of unretired RTFC patronage capital allocations against the outstanding loan balance of an impaired borrower. | |
(11) | Equity |
CFC is required by the District of Columbia cooperative law to have a methodology to allocate its net margin to its members. CFC maintains the current year net margin as unallocated through the end of its fiscal year. At that time, CFC's board of directors allocates its net margin to members in the form of patronage capital and to board approved reserves. Currently, CFC has two such board approved reserves, the education fund and the members' capital reserve. CFC allocates a small portion, less than 1%, of net margin annually to the education fund. The allocation to the education fund must be at least 0.25% of net margin as required by CFC's bylaws. Funds from the education fund are disbursed annually to fund cooperative education among employees and directors of cooperatives in the service territories of each state. The board of directors determines the amount of net margin that is allocated to the members' capital reserve, if any. The members' capital reserve represents margins that are held by CFC to increase equity retention. The margins held in the members' capital reserve have not been allocated to any member, but may be allocated to individual members in the future as patronage capital if authorized by CFC's board of directors. All remaining net margin is allocated to CFC's members in the form of patronage capital. CFC bases the amount of net margin allocated to each member on the members' patronage of the CFC lending programs in the year that the net margin was earned. Members recognize allocations in the form of patronage capital as income when allocated by CFC. There is no impact on CFC's total equity as a result of allocating margins to members in the form of patronage capital or to board approved reserves. CFC's board of directors has annually voted to retire a portion of the patronage capital allocated to members in prior years. CFC's total equity is reduced by the amount of patronage capital retired to members and by amounts disbursed from board approved reserves. CFC adjusts the net margin it allocates to members and board approved reserves to exclude the non-cash impacts of SFAS 133 and 52. | |
In July 2005, CFC's board of directors authorized the allocation of the fiscal year 2005 adjusted net margin as follows: $0.8 million to the education fund, $83 million to members in the form of patronage capital and $33 million to the members' capital reserve. In July 2005, CFC's board of directors also authorized the retirement of allocated margins totaling $71 million, representing 70% of the fiscal year 2005 allocated margin and one-ninth of the fiscal years 1991, 1992 and 1993 allocated margins. This amount was returned to members at the end of August 2005. Under current policy, the remaining 30% of the fiscal year 2005 allocated margin will be retained by CFC and used to fund operations for 15 years and then may be retired. The retirement of allocated margins for fiscal years 1991, 1992 and 1993 is done as part of the transition to the current retirement cycle adopted in 1994 and will last through fiscal year 2008. After that time, under current policy, retirements will be comprised of the 70% of allocated margins from the prior year as approved by the board of directors and the remaining portion of allocated margins retained by CFC from prior years (50% for 1994 and 30% for all years thereafter). Future allocations and retirements of margins will be made annually as determined by CFC's board of directors with due regard for CFC's financial condition. The board of directors of CFC has the authority to change the policy for allocating and retiring net margins at any time, subject to applicable cooperative law. |
At November 30, 2005 and May 31, 2005, equity included the following components: |
(in thousands) | November 30, 2005 | May 31, 2005 | ||||||
Membership fees | $ | 993 | $ | 993 | ||||
Education fund | 766 | 1,200 | ||||||
Members' capital reserve | 164,037 | 164,067 | ||||||
Allocated net margin | 284,441 | 357,323 | ||||||
Unallocated margin | 78,011 | - | ||||||
Total members' equity | 528,248 | 523,583 | ||||||
Prior years cumulative derivative forward |
|
| ||||||
value and foreign currency adjustments | 229,049 | 224,716 | ||||||
Current period derivative forward value (1) | (54,078 | ) | 27,226 | |||||
Current period foreign currency adjustments | 34,479 | (22,893 | ) | |||||
Total retained equity | 737,698 | 752,632 | ||||||
Accumulated other comprehensive income | 14,955 | 16,129 | ||||||
Total equity | $ | 752,653 | $ | 768,761 |
| ||
(1) Represents the derivative forward value (gain) loss recorded by CFC for the period. | ||
| ||
22 |
(12) | Guarantees |
The Company guarantees the contractual obligations of its members so that they may obtain various forms of financing. With the exception of letters of credit, the underlying obligations may not be accelerated so long as the Company performs under its guarantee. At November 30, 2005 and May 31, 2005, the Company had recorded a guarantee liability totaling $15 million and $16 million, respectively, which represents the contingent and non-contingent exposure related to guarantees of members' debt obligations. The contingent guarantee liability at November 30, 2005 and May 31, 2005 totaled $13 million and $16 million, respectively, based on management's estimate of exposure to losses within the guarantee portfolio. The Company uses factors such as internal borrower risk rating, remaining term of guarantee, corporate bond default probabilities and estimated recovery rates in estimating its contingent exposure. The remaining balance of the total guarantee liability of $2 million and less than $1 million, respectively, at November 30, 2005 and May 31, 2005 relates to the non-contingent obligation to stand ready to perform over the term of its guarantees that it has entered into since January 1, 2003. The non-contingent obligation is estimated based on guarantee fees received. The fees are deferred and amortized on the straight-line method into operating income over the term of the guarantees. The Company deferred fees of $1 million and $0.3 million for the six months ended November 30, 2005 and 2004, respectively, related to new guarantees issued during the periods. |
The following chart summarizes total guarantees by type and segment at November 30, 2005 and May 31, 2005. |
(in thousands) | November 30, 2005 | May 31, 2005 | ||||||
Long-term tax-exempt bonds (1) | $ | 628,365 | $ | 738,385 | ||||
Debt portions of leveraged lease transactions (2) | 10,945 | 12,285 | ||||||
Indemnifications of tax benefit transfers (3) | 133,399 | 141,996 | ||||||
Letters of credit (4) | 197,830 | 196,597 | ||||||
Other guarantees (5) | 78,507 | 68,489 | ||||||
Total | $ | 1,049,046 | $ | 1,157,752 | ||||
Total by segment: |
|
| ||||||
CFC: |
|
| ||||||
Distribution | $ | 43,559 | $ | 41,842 | ||||
Power supply | 964,800 | 1,066,373 | ||||||
Statewide and associate | 32,792 | 41,642 | ||||||
CFC total | 1,041,151 | 1,149,857 | ||||||
NCSC | 7,895 | 7,895 | ||||||
Total | $ | 1,049,046 | $ | 1,157,752 |
|
(1) The maturities for this type of guarantee run through 2026. 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. 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 default by a system for non-payment of debt service, CFC is obligated to pay any required amounts under its guarantees, which will prevent the acceleration of the bond issue. The system is required to repay, on demand, any amount advanced by CFC and interest thereon pursuant to the documents evidencing the system's reimbursement obligation. | |
Of the amounts shown above, $585 million and $692 million as of November 30, 2005 and May 31, 2005, 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 the remarketing agents have not previously sold such bonds to other purchasers. CFC's maximum potential exposure includes guaranteed principal and interest related to the bonds. CFC is unable to determine the maximum amount of interest that it could be required to pay related to the floating rate bonds. As of November 30, 2005, CFC's maximum potential exposure for the $43 million of fixed rate tax-exempt bonds is $54 million. Many of these bonds have a call provision that in the event of a default would allow CFC to trigger the call provision. This would limit CFC's exposure to future interest payments on these bonds. CFC's maximum potential exposure is secured by a mortgage lien on all of the system's assets and future revenues. 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. | |
(2) The maturities for this type of guarantee run through 2007. CFC has guaranteed the rent obligation of its members to a third party. In the event of default by the system for non-payment of debt service, CFC is obligated to pay any required amounts under its guarantees, which will prevent the acceleration of the debt obligation. The system is required to repay, on demand, any amount advanced by CFC and interest thereon pursuant to the documents evidencing the system's reimbursement obligation. As of November 30, 2005, CFC's maximum potential exposure for guaranteed principal and interest is $12 million. This amount is secured by the property leased, the owner's rights as lessor and, in some instances, all assets of the lessee. | |
(3) The maturities for this type of guarantee run through 2015. 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. In the event of default by a system for non-payment of indemnity payments, CFC is obligated to pay any required amounts under its guarantees, which will prevent the acceleration of the indemnity payments. The member is required to repay any amount advanced by CFC and interest thereon pursuant to the documents evidencing the system's reimbursement obligation. The amounts shown represent CFC's maximum potential exposure for guaranteed indemnity payments. A member's obligation to reimburse CFC for any guarantee payments would be treated as a long-term loan to the extent of any cash received by the member at the outset of the transaction. This amount is secured by a mortgage lien on all of the system's assets and future revenues. 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. | |
| |
23 |
(4) The maturities for this type of guarantee run through 2017. Additionally, letters of credit totaling $9 million as of November 30, 2005 have a term of one year and automatically extend for periods of one year unless the Company cancels the agreement within 120 days of maturity (in which case, the beneficiary may draw on the letter of credit). The Company issues irrevocable letters of credit to support members' obligations to energy marketers and other third parties and to the Rural Business and Cooperative Development Service with issuance fees as may be determined from time to time. Each letter of credit issued is supported by a reimbursement agreement with the member on whose behalf the letter of credit was issued. In the event a beneficiary draws on a letter of credit, the agreement generally requires the member to reimburse the Company within one year from the date of the draw. Interest would accrue from the date of the draw at the line of credit variable rate of interest in effect on such date. The agreement also requires the member to pay, as applicable, a late payment charge and all costs of collection, including reasonable attorneys' fees. As of November 30, 2005, the Company's maximum potential exposure is $198 million, of which $156 million is secured. Security provisions include a mortgage lien on all of the system's assets, future revenues, and the system's commercial paper invested at the Company. In addition to the letters of credit listed in the table above, under master letter of credit facilities, the Company may be required to issue up to an additional $200 million in letters of credit to third parties for the benefit of its members at November 30, 2005. At May 31, 2005, this amount was $212 million. | |
(5) The maturities for this type of guarantee run through 2025. CFC provides other guarantees as required by its members. In the event of default by a system for non-payment of the obligation, CFC must pay any required amounts under its guarantees, which will prevent the acceleration of the obligation. Such guarantees may be made on a secured or unsecured basis with guarantee fees set to cover CFC's general and administrative expenses, a provision for losses and a reasonable margin. The member is required to repay any amount advanced by CFC and interest thereon pursuant to the documents evidencing the system's reimbursement obligation. Of CFC's maximum potential exposure for guaranteed principal and interest totaling $79 million at November 30, 2005, $8 million is secured by a mortgage lien on all of the system's assets and future revenues and the remaining $71 million is unsecured. |
(13) | Contingencies |
The Company had the following loans classified as non-performing and restructured. |
As of | ||||||||
(in thousands) | November 30, 2005 | May 31, | November 30, 2004 | |||||
Non-performing loans | $ | 558,105 | $ | 616,626 | $ | 186,689 | ||
Restructured loans | 588,431 | 600,926 | 613,499 | |||||
Total | $ | 1,146,536 | $ | 1,217,552 | $ | 800,188 |
(a) During the six months ended November 30, 2005 and 2004, all loans classified as non-performing were on a non-accrual status with respect to the recognition of interest income. At November 30, 2005 and May 31, 2005, $581 million and $594 million, respectively, of restructured loans were on non-accrual status with respect to the recognition of interest income. At November 30, 2004, there were $606 million of restructured loans on non-accrual status. A total of $0.3 million of interest income was accrued on restructured loans during the six months ended November 30, 2005. No interest income was accrued on restructured loans for the six months ended November 30, 2004. |
Interest income was reduced as a result of holding loans on non-accrual status for the six months ended November 30, 2005 and 2004 as follows. |
Reduction to interest income | ||||||||
(in thousands) | November 30, 2005 | November 30, 2004 | ||||||
Non-performing loans | $ | 20,929 | $ | 7,838 | ||||
Restructured loans |
17,031
12,151
$
37,960
$
19,989
(b) The Company classified $1,138 million and $1,208 million of loans as impaired pursuant to the provisions of SFAS 114, Accounting by Creditors for Impairment of a Loan - an Amendment of SFAS 5 and SFAS 15, as amended, at November 30, 2005 and May 31, 2005, respectively. The Company reserved $432 million and $404 million of the loan loss allowance for such impaired loans at November 30, 2005 and May 31, 2005, respectively. The amount included in the loan loss allowance for such loans was based on a comparison of the present value of the expected future cash flow associated with the loan discounted at the original contract interest rate and/or the estimated fair value of the collateral securing the loan to the recorded investment in the loan. Impaired loans may be on accrual or non-accrual status with respect to the recognition of interest income based on a review of the terms of the restructure agreement and borrower performance. The Company did not accrue interest income on loans classified as impaired during the six months ended November 30, 2005 and 2004. The average recorded investment in impaired loans for the six months ended November 30, 2005 and 2004 was $1,158 million and $896 million, respectively. |
The Company updates impairment calculations on a quarterly basis. Since a borrower's original contract rate may include a variable rate component, calculated impairment could vary with changes to the Company's variable rate, independent of a borrower's underlying financial performance or condition. In addition, the calculated impairment for a borrower will fluctuate |
|
24 |
based on changes to certain assumptions. Changes to assumptions include, but are not limited to the following: | ||
* | court rulings, | |
* | changes to collateral values, and | |
* | changes to expected future cash flows both as to timing and amount. | |
(c) At November 30, 2005 and May 31, 2005, CFC had a total of $581 million and $594 million, respectively, of loans outstanding to CoServ, a large electric distribution cooperative located in Denton County, Texas, that provides retail electric service to residential and business customers. All loans have been on non-accrual status since January 1, 2001. Total loans to CoServ at November 30, 2005 and May 31, 2005 represented 3.0% and 2.9%, respectively, of the Company's total loans and guarantees outstanding. | ||
Under the terms of a bankruptcy settlement, CFC restructured its loans to CoServ. CoServ is scheduled to make quarterly payments to CFC through December 2037. As part of the restructuring, CFC may be obligated to provide up to $200 million of senior secured capital expenditure loans to CoServ for electric distribution infrastructure through December 2012. If CoServ requests capital expenditure loans from CFC, these loans will be provided at the standard terms offered to all borrowers and will require debt service payments in addition to the quarterly payments that CoServ is required to make to CFC. As of November 30, 2005, no amounts have been advanced to CoServ under this loan facility. To date, CoServ has made all payments required under the restructure agreement. Under the terms of the restructure agreement, CoServ has the option to prepay the loan for $415 million plus an interest payment true up on or after December 13, 2007 and for $405 million plus an interest payment true up on or after December 13, 2008. | ||
CoServ and CFC have no claims related to any of the legal actions asserted prior to or during the bankruptcy proceedings. CFC's legal claim against CoServ will now be limited to CoServ's performance under the terms of the bankruptcy settlement. | ||
Based on its analysis, the Company believes that it is adequately reserved for its exposure to CoServ at November 30, 2005. | ||
(d) VarTec Telecom, Inc. ("VarTec") is a telecommunications company and RTFC borrower located in Dallas, Texas. RTFC is VarTec's principal senior secured creditor. At November 30, 2005 and May 31, 2005, RTFC had a total of $81 million and $135 million, respectively, of loans outstanding to VarTec. At November 30, 2005 and May 31, 2005, all loans to VarTec were on non-accrual status, resulting in the application of all payments received against principal. | ||
VarTec and 16 of its U.S.-based affiliates, which were guarantors of VarTec's debt to RTFC, filed voluntary petitions under Chapter 11 of the United States Bankruptcy Code on November 1, 2004 in Dallas, Texas. On July 29, 2005, the court approved a sale of VarTec's remaining operating assets (the "Domestic Assets Sale"). In August 2005, RTFC received $32 million representing partial payment of proceeds from the Domestic Assets Sale. Final closing of the Domestic Assets Sale is subject to regulatory approvals; in the interim VarTec will continue to operate its business. | ||
The court ordered that all net proceeds of asset sales, including the Domestic Assets Sale, be provisionally applied to RTFC's secured debt. The application is subject to third parties' rights, if any, superior to RTFC's rights and liens, and to further court order to require the return of such funds for use as cash collateral under the Bankruptcy Code. | ||
On June 10, 2005, the Official Committee of Unsecured Creditors (the "UCC") initiated an adversary proceeding against RTFC in the United States Bankruptcy Court for the Northern District of Texas, Dallas Division. The adversary proceeding asserts the following claims: (i) that RTFC may have engaged in wrongful activities prior to the filing of the bankruptcy proceeding (e.g., RTFC had "control" over VarTec's affairs, RTFC exerted "financial leverage" over VarTec and is liable for VarTec's "deepening insolvency"); (ii) that RTFC's claims against VarTec should be equitably subordinated to the claims of other creditors because of the alleged wrongful activities; and (iii) that certain payments made by VarTec to RTFC and certain liens granted to RTFC are avoidable as preferences or fraudulent transfers or should otherwise be avoided and re-distributed for the benefit of VarTec's bankruptcy estates. The adversary proceeding identifies payments made by VarTec to RTFC of approximately $141 million, but does not specify damages sought. On December 16, 2005, the Court issued an order dismissing the "deepening insolvency" claim against RTFC. Trial, if necessary, on the merits of the remaining claims is currently scheduled for August 2006. The trial date is subject to change. | ||
On October 14, 2005, the Bankruptcy Court approved an administrative DIP facility from RTFC in the amount of $9 million, of which $4 million was outstanding as of November 30, 2005. | ||
Based on its analysis, the Company believes that it is adequately reserved for its exposure to VarTec at November 30, 2005. | ||
25 |
(e) Innovative Communication Corporation ("ICC") is a diversified telecommunications company and RTFC borrower headquartered in St. Croix, United States Virgin Islands ("USVI"). In the USVI, through its subsidiary Virgin Islands Telephone Corporation d/b/a Innovative Telephone ("Vitelco"), ICC provides wire line local and long-distance telephone services. Cable television service and/or wireless telephone service is provided to subscribers in the USVI and a number of other islands located in the eastern and southern Caribbean and mainland France. ICC also owns a local newspaper based in St. Thomas, USVI and operates a public access television station that serves the USVI. |
As of November 30, 2005 and May 31, 2005, RTFC had $475 million in loans outstanding to ICC. All loans to ICC have been on non-accrual status since February 1, 2005. |
RTFC is the primary secured lender to ICC. RTFC's collateral for the loans includes (i) a series of mortgages, security agreements, financing statements, pledges and guaranties creating liens in favor of RTFC on substantially all of the assets and voting stock of ICC, (ii) a direct pledge of 100% of the voting stock of ICC's USVI local exchange carrier subsidiary, Vitelco, (iii) secured guaranties, mortgages and direct and indirect stock pledges encumbering the assets and ownership interests in substantially all of ICC's other operating subsidiaries, and (iv) a personal guaranty of the loans from ICC's indirect majority shareholder and chairman, Jeffrey Prosser ("Prosser") |
On June 1, 2004, RTFC filed a lawsuit in the United States District Court for the Eastern District of Virginia against ICC for failure to comply with the terms of its loan agreement with RTFC dated August 27, 2001 as amended on April 4, 2003 (hereinafter, the "loan default action"). RTFC thereafter amended the complaint to allege additional loan agreement defaults by ICC and to demand the full repayment of ICC's total outstanding debt under the loan agreement, including all principal, interest and fees. ICC answered the amended complaint, denied that it is in default under the loan agreement, and asserted a counterclaim seeking the reformation of the loan agreement to conform to a 1989 settlement agreement among the Virgin Islands Public Services Commission, ICC's predecessor, and RTFC, in a manner that ICC contended would relieve it of some of the defaults alleged in the amended complaint. |
On September 22, 2004, RTFC filed a lawsuit in the United States District Court for the Eastern District of Virginia against Prosser in his capacity as a guarantor of the indebtedness of ICC to RTFC. Prosser, in his capacity as guarantor, is jointly and severally liable for all existing, current and future ICC indebtedness (hereinafter, the "guarantee action"). RTFC is seeking to recover from Prosser the full amount of principal, interest and fees due from ICC. Prosser answered the complaint by denying liability and all material allegations therein. |
By an order dated October 19, 2004, the Court granted ICC's motion to transfer the loan default action and the guarantee action to the District Court for the District of the Virgin Islands. The Court also granted a motion to allow ICC to add a first supplemental counterclaim for anticipatory breach relating to RTFC's alleged funding obligation for the settlement of a litigation brought by shareholders of ICC's former parent company against ICC and some of its directors in connection with a buyout of those shareholders by ICC in 1998 (the "Greenlight litigation"). RTFC replied to ICC's counterclaim for anticipatory breach by denying all material allegations and liability. |
On January 11, 2005, RTFC served a motion for partial summary judgment in the loan default action. In its motion, RTFC sought partial summary judgment as to ICC's liability for certain events of default alleged in the amended complaint. In addition, RTFC sought summary judgment dismissing ICC's defense and counterclaim for reformation of the loan agreement, and ICC's counterclaim for anticipatory repudiation in connection with the alleged obligation to fund ICC's settlement of the Greenlight litigation. ICC opposed the motion for summary judgment and cross-moved for summary judgment dismissing the loan default action on the ground that the loan is not in default for various reasons, including those set forth in its answer and counterclaims. On October 31, 2005, ICC moved to further amend its answer to deny the authenticity of the loan agreement in the loan default action. RTFC opposed that motion and filed its response on December 21, 2005. That motion has not yet been ruled upon by the Court. On December 29, 2005, the Court denied RTFC's motion and denied in part and granted in part ICC's motion, holding that some but not all of RTFC's allegations of default should be dismissed. |
On September 30, 2004, RTFC filed a derivative action for itself and on behalf of ICC and Vitelco against certain members of the Boards of Directors for ICC and Vitelco, seeking recovery of damages for alleged wrongful acts of the named defendant directors. ICC and Vitelco have each filed motions to dismiss which are currently pending. On November 16, 2005, Judge Curtis V. Gomez issued a ruling recusing himself from this action. The case had not been reassigned as of November 30, 2005. |
26 |
On January 10, 2006, Emerging Communications, Inc. (Emcom") and Innovative Communication Corporation, LLC ("ICC-LLC") filed an action for contribution in the District Court for the District of the Virgin Islands against RTFC. The complaint alleges that Emcom and ICC-LLC are entitled to contribution from RTFC in connection with a transaction which resulted in judgments being entered against Emcom and ICC-LLC on or about January 9, 2006 in the Delaware Chancery Court in the amount of $56.3 million plus interest based upon tortious conduct of Emcom and ICC-LLC, as well as an appraisal judgment against Emcom for $28.5 million plus interest. RTFC has not yet been served with this suit. RTFC believes that the action is without merit, that it has meritorious defenses, and will seek to have it dismissed. | |
The District Court for the District of the Virgin Islands has ordered RTFC and ICC to engage in a judicially-supervised mediation process. That process is ongoing in the District Court for the District of New Jersey. | |
Based on its analysis, the Company believes that it is adequately reserved for its exposure to ICC at November 30, 2005. | |
| |
(14) | Gain on Sale of Building and Land |
| |
On October 18, 2005, CFC sold its headquarters facility in Fairfax County, Virginia to an affiliate of Prentiss Properties Acquisition Partners, L.P. for $85 million. The assets had a net book value of $40 million, thus generating a total gain of $44 million, net of $1 million in closing and other related costs. A payment of $79 million was received on October 18, 2005, which resulted in the recognition of a gain of $38 million for the six months ended November 30, 2005. The remaining $6 million of the sales price was held in escrow until January 2006 when certain conditions were met and will be recognized in the third quarter of fiscal year 2006. The $6 million was held in escrow to allow for the right of first refusal on the unimproved land that was given to the original developers of the property as part of CFC's purchase of the land. CFC will lease back approximately one-third of the office space from the purchaser for three years with two one-year options to renew. The headquarters facility consists of two six-story buildings and adjacent parking garages situated on ten acres of land and two acres of unimproved land adjacent to the office buildings. | |
| |
(15) | Segment Information |
| |
The Company's consolidated financial statements include the financial results of CFC, RTFC and NCSC. Full financial statements are produced for each of the three companies and are the primary reports that management reviews in evaluating performance. The segment presentation for three and the six months ended November 30, 2005 and 2004 reflects the operating results of each of the three companies: CFC, RTFC and NCSC. | |
Pursuant to guarantee agreements, CFC has agreed to indemnify RTFC and NCSC for loan losses, with the exception of the NCSC consumer loan program. Thus CFC maintains the majority of the total consolidated loan loss allowance. A small loan loss allowance is maintained by NCSC to cover its consumer loan exposure. | |
27 |
The following chart contains the consolidated statement of operations for the six months ended November 30, 2005 and consolidated balance sheet information at November 30, 2005. |
(in thousands) | CFC | RTFC | NCSC | Consolidated | ||||||||||||
Statement of Operations: | ||||||||||||||||
Operating income | $ | 407,412 | $ | 65,584 | $ | 15,166 | $ | 488,162 | ||||||||
Cost of funds | (392,063 | ) | (61,887 | ) | (12,379 | ) | (466,329 | ) | ||||||||
Gross margin | 15,349 | 3,697 | 2,787 | 21,833 | ||||||||||||
|
|
|
| |||||||||||||
Operating expenses: | ||||||||||||||||
General and administrative expenses | (21,602 | ) | (2,220 | ) | (1,046 | ) | (24,868 | ) | ||||||||
Rental and other income | 1,475 | - | - | 1,475 | ||||||||||||
Provision for loan losses | (3,886 | ) | - | - | (3,886 | ) | ||||||||||
Recovery of guarantee losses | 2,600 | - | - | 2,600 | ||||||||||||
Total operating expenses | (21,413 | ) | (2,220 | ) | (1,046 | ) | (24,679 | ) | ||||||||
|
|
|
| |||||||||||||
Results of operations of foreclosed assets | 8,570 | - | - | 8,570 | ||||||||||||
|
|
|
| |||||||||||||
Derivative cash settlements | 37,765 | - | (749 | ) | 37,016 | |||||||||||
Derivative forward value | (54,078 | ) | - | 3,473 | (50,605 | ) | ||||||||||
Foreign currency adjustments | 34,479 | - | - | 34,479 | ||||||||||||
Total gain on derivative and foreign | ||||||||||||||||
currency adjustments | 18,166 | - | 2,724 | 20,890 | ||||||||||||
Operating margin | 20,672 | 1,477 | 4,465 | 26,614 | ||||||||||||
Gain on sale of building and land | 37,740 | - | - | 37,740 | ||||||||||||
Income tax expense | - | (34 | ) | (1,695 | ) | (1,729 | ) | |||||||||
Net margin per segment reporting | $ | 58,412 | $ | 1,443 | $ | 2,770 | $ | 62,625 | ||||||||
Reconciliation of net margin: | ||||||||||||||||
Net margin per segment reporting | $ | 62,625 | ||||||||||||||
Minority interest | (4,213 | ) | ||||||||||||||
Net margin per consolidated statement of operations | $ | 58,412 | ||||||||||||||
Assets: | ||||||||||||||||
Loans to members | $ | 15,429,894 | $ | 2,269,500 | $ | 447,364 | $ | 18,146,758 | ||||||||
Less: Allowance for loan losses | (592,358 | ) | - | (1,174 | ) | (593,532 | ) | |||||||||
Loans to members, net | 14,837,536 | 2,269,500 | 446,190 | 17,553,226 | ||||||||||||
Other assets | 1,058,624 | 241,708 | 42,252 | 1,342,584 | ||||||||||||
Total assets | $ | 15,896,160 | $ | 2,511,208 | $ | 488,442 | $ | 18,895,810 | ||||||||
28 |
The following chart contains the consolidated statement of operations for the six months ended November 30, 2004 and consolidated balance sheet information at November 30, 2004. |
(in thousands) | CFC | RTFC | NCSC | Consolidated | ||||||||||||
Statement of Operations: |
|
| ||||||||||||||
Operating income | $ | 379,560 |
|
| $ | 136,274 |
|
| $ | 12,595 |
|
| $ | 528,429 |
|
|
Cost of funds |
| (313,400 | ) |
|
| (133,059 | ) |
|
| (8,722 | ) |
|
| (455,181 | ) |
|
Gross margin |
| 66,160 |
|
|
| 3,215 |
|
|
| 3,873 |
|
|
| 73,248 |
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative expenses |
| (22,349 | ) |
|
| (1,319 | ) |
|
| (547 | ) |
|
| (24,215 | ) |
|
Rental and other income |
| 2,657 |
|
|
| - |
|
|
| - |
|
|
| 2,657 |
|
|
Recovery of guarantee losses |
| 1,107 |
|
|
| - |
|
|
| - |
|
|
| 1,107 |
|
|
Total operating expenses |
| (18,585 | ) |
|
| (1,319 | ) |
|
| (547 | ) |
|
| (20,451 | ) |
|
|
|
|
| |||||||||||||
Results of operations of foreclosed assets |
| 5,355 |
|
|
| - |
|
|
| - |
|
|
| 5,355 |
|
|
|
|
|
| |||||||||||||
Derivative cash settlements |
| 14,890 |
|
|
| - |
|
|
| (1,006 | ) |
|
| 13,884 |
|
|
Derivative forward value |
| 138,537 |
|
|
| - |
|
|
| 111 |
|
|
| 138,648 |
|
|
Foreign currency adjustments |
| (79,072 | ) |
|
| - |
|
|
| - |
|
|
| (79,072 | ) |
|
Total gain (loss) on derivative and foreign |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
currency adjustments |
| 74,355 | - |
|
|
| (895 | ) |
|
| 73,460 |
|
| |||
Operating margin |
| 127,285 |
|
|
| 1,896 |
|
|
| 2,431 |
|
|
| 131,612 |
|
|
Income tax expense |
| - |
|
|
| (34 | ) |
|
| (809 | ) |
|
| (843 | ) |
|
Net margin per segment reporting | $ | 127,285 | $ | 1,862 | $ | 1,622 | $ | 130,769 | ||||||||
Reconciliation of net margin: |
|
|
|
| ||||||||||||
Net margin per segment reporting |
|
|
| $ | 130,769 | |||||||||||
Minority interest |
|
|
| (1,862 | ) | |||||||||||
Net margin per consolidated statement of operations |
|
|
| $ | 128,907 | |||||||||||
Assets: |
|
|
|
| ||||||||||||
Loans to members | $ | 15,534,127 | $ | 3,520,446 | $ | 466,961 | $ | 19,521,534 | ||||||||
Less: Allowance for loan losses | (571,842 | ) | - | (1,901 | ) | (573,743 | ) | |||||||||
Loans to members, net | 14,962,285 | 3,520,446 | 465,060 | 18,947,791 | ||||||||||||
Other assets | 1,627,888 | 352,802 | 52,342 | 2,033,032 | ||||||||||||
Total assets | $ | 16,590,173 | $ | 3,873,248 | $ | 517,402 | $ | 20,980,823 | ||||||||
|
The following chart contains income statement information for the three months ended November 30, 2005. |
(in thousands) | CFC |
| RTFC |
| NCSC |
| Consolidated |
| ||||||||
Statement of Operations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income | $ | 203,388 |
|
| $ | 29,729 |
|
| $ | 7,684 |
|
| $ | 240,801 |
|
|
Cost of funds |
| (199,327 | ) |
|
| (27,945 | ) |
|
| (6,296 | ) |
|
| (233,568 | ) |
|
Gross margin |
| 4,061 |
|
|
| 1,784 |
|
|
| 1,388 |
|
|
| 7,233 |
|
|
|
|
|
| |||||||||||||
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative expenses |
| (11,081 | ) |
|
| (1,088 | ) |
|
| (582 | ) |
|
| (12,751 | ) |
|
Rental and other income |
| 13 |
|
|
| - |
|
|
| - |
|
|
| 13 |
|
|
Provision for loan losses |
| (3,886 | ) |
| - |
|
|
| - |
|
|
| (3,886 | ) |
| |
Provision for guarantee losses |
| (700 | ) |
|
| - |
|
|
| - |
|
|
| (700 | ) |
|
Total operating expenses |
| (15,654 | ) |
|
| (1,088 | ) |
|
| (582 | ) |
|
| (17,324 | ) |
|
|
|
|
| |||||||||||||
Results of operations of foreclosed assets |
| 3,878 |
|
|
| - |
|
|
| - |
|
|
| 3,878 |
|
|
|
|
|
| |||||||||||||
Derivative cash settlements |
| 17,114 |
|
|
| - |
|
|
| (298 | ) |
|
| 16,816 |
|
|
Derivative forward value |
| (19,149 | ) |
|
| - |
|
|
| 3,433 |
|
|
| (15,716 | ) |
|
Foreign currency adjustments |
| 35,739 |
|
|
| - |
|
|
| - |
|
|
| 35,739 |
|
|
Total gain on derivative and foreign |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
currency adjustments |
| 33,704 |
|
|
| - |
|
|
| 3,135 |
|
|
| 36,839 |
|
|
Operating margin |
| 25,989 |
|
|
| 696 |
|
|
| 3,941 |
|
|
| 30,626 |
|
|
Gain on sale of building and land |
| 37,740 |
|
|
| - |
|
|
| - |
|
|
| 37,740 |
|
|
Income tax expense |
| - |
|
|
| (34 | ) |
|
| (1,496 | ) |
|
| (1,530 | ) |
|
Net margin per segment reporting | $ | 63,729 |
|
| $ | 662 |
|
| $ | 2,445 |
|
| $ | 66,836 |
|
|
|
|
| ||||||||||||||
Reconciliation of net margin: |
|
|
| |||||||||||||
Net margin per segment reporting |
| $ | 66,836 | |||||||||||||
Minority interest |
| (3,107 | ) | |||||||||||||
Net margin per consolidated statement of operations |
| $ | 63,729 | |||||||||||||
29 |
The following chart contains income statement information for the three months ended November 30, 2004. |
(in thousands) | CFC |
| RTFC |
| NCSC |
| Consolidated |
| ||||||||
Statement of Operations: | ||||||||||||||||
Operating income | $ | 207,472 | $ | 67,372 | $ | 6,460 | $ | 281,304 | ||||||||
Cost of funds | (156,431 | ) | (65,821 | ) | (4,551 | ) | (226,803 | ) | ||||||||
Gross margin | 51,041 | 1,551 | 1,909 | 54,501 | ||||||||||||
|
|
|
| |||||||||||||
Operating expenses: | ||||||||||||||||
General and administrative expenses | (11,268 | ) | (257 | ) | (283 | ) | (11,808 | ) | ||||||||
Rental and other income | 1,275 | - | - | 1,275 | ||||||||||||
Provision for loan losses | - | - | - | - | ||||||||||||
Recovery of guarantee losses | 700 | - | - | 700 | ||||||||||||
Total operating expenses | (9,293 | ) | (257 | ) | (283 | ) | (9,833 | ) | ||||||||
|
|
|
| |||||||||||||
Results of operations of foreclosed assets | 2,928 | - | - | 2,928 | ||||||||||||
Derivative cash settlements | (5,946 | ) | - | (468 | ) | (6,414 | ) | |||||||||
Derivative forward value | 83,272 | - | 632 | 83,904 | ||||||||||||
Foreign currency adjustments | (84,212 | ) | - | - | (84,212 | ) | ||||||||||
Total gain on derivative and foreign |
|
|
|
| ||||||||||||
currency adjustments | (6,886 | ) | - | 164 | (6,722 | ) | ||||||||||
Operating margin | 37,790 | 1,294 | 1,790 | 40,874 | ||||||||||||
Income tax expense | - | (34 | ) | (614 | ) | (648 | ) | |||||||||
Net margin per segment reporting | $ | 37,790 | $ | 1,260 | $ | 1,176 | $ | 40,226 | ||||||||
Reconciliation of net margin: |
| |||||||||||||||
Net margin per segment reporting | $ | 40,226 | ||||||||||||||
Minority interest | (1,260 | ) | ||||||||||||||
Net margin per consolidated statement of operations | $ | 38,966 | ||||||||||||||
|
(16) Subsequent Events |
In December 2005, CFC repurchased $31 million of the 5.95% subordinated deferrable debt securities due 2045 and $8 million of the 6.10% subordinated deferrable debt securities due 2044. CFC recognized a gain of $1 million on the early redemption of the deferrable subordinated debt securities. |
|
30 |
PART II. | OTHER INFORMATION | ||
| |||
Item 6. | Exhibits | ||
31.1 - | Certification of the Chief Executive Officer required by Section 302 of the Sarbanes-Oxley Act of 2002. | ||
31.2 - | Certification of the Chief Financial Officer required by Section 302 of the Sarbanes-Oxley Act of 2002. | ||
32.1 - | Certification of the Chief Executive Officer required by Section 906 of the Sarbanes-Oxley Act of 2002. | ||
32.2 - | Certification of the Chief Financial Officer required by Section 906 of the Sarbanes-Oxley Act of 2002. | ||
31 |
Signatures | ||
| ||
Pursuant to the requirements 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. | ||
| ||
NATIONAL RURAL UTILITIES COOPERATIVE | ||
FINANCE CORPORATION | ||
| ||
/s/ Steven L. Lilly | ||
Steven L. Lilly | ||
Chief Financial Officer | ||
January 20, 2006 | ||
32 |