<PAGE> 1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended November 30, 1993
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)
<TABLE>
<S> <C>
DISTRICT OF COLUMBIA 52-0891669
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
</TABLE>
Woodland Park, 2201 Cooperative Way, Herndon, VA 22071-3025
(Address of principal executive offices)
Registrant's telephone number, including 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
Page 1 of 21
<PAGE> 2
<TABLE>
<CAPTION>
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
COMBINED BALANCE SHEETS
(Dollar Amounts In Thousands)
A S S E T S
(Unaudited)
November 30, 1993 May 31, 1993
<S> <C> <C>
Cash $ 21,717 $ 55,450
Marketable Securities 22,059 0
Debt Service Investments 40,545 45,611
Loans To Members, net 5,411,274 5,112,471
Receivables 85,643 87,763
Fixed Assets, net 31,135 31,777
Debt Service Reserve Funds 113,134 116,470
Other Assets 13,671 14,602
Total Assets $ 5,739,178 $ 5,464,144
The accompanying notes are an integral part of these combined financial statements.
</TABLE>
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<PAGE> 3
<TABLE>
<CAPTION>
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
COMBINED BALANCE SHEETS
(Dollar Amounts In Thousands)
L I A B I L I T I E S A N D M E M B E R S' E Q U I T Y
(Unaudited)
November 30, 1993 May 31, 1993
<S> <C> <C>
Notes Payable, due within one year $ 935,319 $ 503,624
Accounts Payable 17,560 18,019
Accrued Interest Payable 41,135 47,822
Long-Term Debt 3,229,390 3,382,284
Other Liabilities 40,917 38,549
Commitments, Guarantees and Contingencies
(Notes 7, 9, 10 and 11)
Members' Subordinated Certificates:
Membership subscription certificates 640,520 640,520
Loan and guarantee certificates 579,001 575,027
Total Members' Subordinated Certificates 1,219,521 1,215,547
Members' Equity (Note 8) 255,336 258,299
Total Members' Subordinated Certificates
and Members' Equity 1,474,857 1,473,846
Total Liabilities and Members' Equity $ 5,739,178 $ 5,464,144
The accompanying notes are an integral part of these combined financial statements.
</TABLE>
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<PAGE> 4
<TABLE>
<CAPTION>
UNAUDITED
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
COMBINED STATEMENTS OF INCOME, EXPENSES AND NET MARGINS
(Dollar Amounts in Thousands)
For the Quarters and Six Months Ended November 30, 1993 and 1992
Quarters Ended Six Months Ended
November 30, November 30,
1993 1992 1993 1992
<S> <C> <C> <C> <C>
Operating Income - Interest on loans to members $ 82,110 $ 84,684 $162,606 $172,098
Less-Cost of funds allocated 64,131 66,009 127,579 135,283
Gross operating margin 17,979 18,675 35,027 36,815
Expenses:
General, administrative and loan processing 4,154 4,121 8,070 8,108
Provision for loan and guarantee losses (Note 4) 1,875 3,750 3,750 7,500
Total expenses 6,029 7,871 11,820 15,608
Operating margin 11,950 10,804 23,207 21,207
Nonoperating Income 513 272 2,412 1,511
Net Margins Before Extraordinary Loss 12,463 11,076 25,619 22,718
Extraordinary Loss (Note 13) - - - (3,161)
Net Margins $ 12,463 $ 11,076 $ 25,619 $ 19,557
The accompanying notes are an integral part of these combined financial statements.
</TABLE>
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<PAGE> 5
<TABLE>
<CAPTION>
(UNAUDITED)
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
COMBINED STATEMENTS OF CHANGES IN MEMBERS' EQUITY
(Dollar Amounts In Thousands)
For the Quarters Ended November 30, 1993 and 1992
Other Equities
Patronage Capital
Allocated
Educa- Unal- General
Member tional located Reserve
Total ships Fund Margins Fund Other
<S> <C> <C> <C> <C> <C> <C>
Quarter Ended November 30, 1993
Balance at August 31, 1993 $243,656 $ 1,277 $ 313 $ 15,444 $ 193 $226,429
Retirement of patronage capital 0 - - - - -
Net Margins 12,463 - - 12,463 - -
Other (783) 23 32 - - (838)
Balance at November 30, 1993 $255,336 $ 1,300 $ 345 $ 27,907 $ 193 $225,591
Quarter Ended November 30, 1992
Balance at May 31, 1992 $230,064 $ 1,203 $ 289 $ 10,770 $ 476 $217,326
Retirement of patronage capital 0 - - - - -
Net Margins 11,076 - - 11,076 - -
Other 16 16 31 - - (31)
Balance at November 30, 1992 $241,156 $ 1,219 $ 320 $ 21,846 $ 476 $217,295
The accompanying notes are an integral part of these combined financial statements.
</TABLE>
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<PAGE> 6
<TABLE>
<CAPTION>
(UNAUDITED)
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
COMBINED STATEMENTS OF CHANGES IN MEMBERS' EQUITY
(Dollar Amounts In Thousands)
For the Six Months Ended November 30, 1993 and 1992
Other Equities
Patronage Capital
Allocated
Educa- Unal- General
Member tion allocated Reserve
Total ships Fund Margins Fund Other
<S> <C> <C> <C> <C> <C> <C>
Six Months Ended November 30, 1993
Balance at May 31, 1993 $258,299 $ 1,247 $ 312 $ 2,289 $ 488 $253,963
Retirement of patronage capital (27,984) - - - (295) (27,689)
Net Margins 25,619 - - 25,619 - -
Other (598) 53 33 (1) - (683)
Balance at November 30, 1993 $225,336 $ 1,300 $ 345 $ 27,907 $ 193 $225,591
Six Months Ended November 30, 1992
Balance at May 31, 1992 $246,696 $ 1,181 $ 289 $ 2,289 $ 483 $242,454
Retirement of patronage capital (25,419) - - - (7) (25,412)
Net Margins 19,557 - - 19,557 - -
Other 322 38 31 - - 253
Balance at November 30, 1992 $241,156 $ 1,219 $ 320 $ 21,846 $ 476 $217,295
The accompanying notes are an integral part of these combined financial statements.
</TABLE>
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<PAGE> 7
<TABLE>
<CAPTION>
(UNAUDITED)
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
COMBINED STATEMENTS OF CASH FLOWS
(Dollar Amounts In Thousands)
For the Six Months Ended November 30, 1993 and 1992
1993 1992
<S> <C> <C>
Cash Flows From Operating Activities:
Accrual basis net margins $ 25,619 $ 19,557
Add (deduct):
Provision for loan and guarantee losses 3,750 7,500
Depreciation 1,801 1,551
Amortization of deferred income (9,285) (5,600)
Add (deduct) changes in accrual accounts:
Receivables (269) (7,605)
Accounts payable (259) 1,933
Accrued interest payable (6,808) (4,490)
Deferred Income 10,769 30,646
Other 264 3,566
Net cash flows provided by operating activities 25,582 47,058
Cash Flows From Investing Activities:
Advances made on loans (932,967) (711,945)
Principal collected on loans 630,413 770,027
Investment in fixed assets (143) (4,661)
Net cash flows used in investing activities (302,697) 53,421
Cash Flows From Financing Activities:
Notes payable, net 431,695 185,547
Arbitrage investments, net (22,059) -
Debt service investments, net 5,067 13,830
Proceeds from issuance of long-term debt 50,934 57,348
Payments for retirement of long-term debt (204,195) (346,929)
Proceeds from issuance of Members' Subordinated
Certificates 13,612 10,895
Payments for retirement of Members' Subordinated
Certificates (4,622) (8,052)
Payments for retirement of patronage capital (27,050) (25,419)
Net cash flows provided by financing activities 243,382 (112,780)
Net Cash Flows (33,733) (12,301)
Beginning Cash 55,450 46,312
Ending Cash $ 21,717 $ 34,011
Supplemental Disclosure of Cash Flow Information:
Cash paid during six months for interest expense $ 134,982 $ 141,711
The accompanying notes are an integral part of these combined financial statements.
</TABLE>
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<PAGE> 8 Notes to Combined Financial Statements
1. General Information
National Rural Utilities Cooperative Finance Corporation ("CFC") is a
private, not-for-profit cooperative association which provides supplemental
financing and related financial service programs for the benefit of its
members. Membership is limited to certain cooperatives, not-for-profit
corporations, public bodies and related service organizations, as defined
in CFC's Bylaws. CFC is exempt from the payment of Federal income taxes
under Section 501(c)(4) of the Internal Revenue Code.
CFC's 1,035 members as of November 30, 1993, included 898 rural electric
utility system members ("Utility Members"), virtually all of which are
consumer-owned cooperatives, 72 service members and 65 associate members.
The Utility Members included 834 distribution systems and 64 generation and
transmission systems operating in 46 states and U.S. territories. At
December 31, 1992, CFC's member systems served approximately 12.2 million
consumers, representing service to an estimated 28.8 million ultimate users
of electricity and owned approximately $60.8 billion (before depreciation
of $16.4 billion) in total utility plant.
Rural Telephone Finance Cooperative ("RTFC") was incorporated as a private
cooperative association in the State of South Dakota in September 1987.
RTFC is a controlled affiliate of CFC and was created for the purpose of
providing, securing and arranging financing for its rural telecommunication
members and affiliates. RTFC's results have been combined with those of
CFC in the accompanying financial statements. As of November 30, 1993,
RTFC had 320 members. RTFC is a taxable entity under Subchapter T of
the Internal Revenue Code and accordingly takes tax deductions for
allocations of net margins to its patrons.
Guaranty Funding Cooperative ("GFC") was incorporated as a private
cooperative association in the state of South Dakota in December 1991. GFC
is a controlled affiliate of CFC and was created for the purpose of
providing and servicing loans to its members to fund the financing of loans
guaranteed by the Rural Electrification Administration ("REA"). GFC's
results have been combined with those of CFC and RTFC in the accompanying
financial statements. Loans held by GFC were transferred to GFC by CFC and
are guaranteed by the REA. GFC had two members other than CFC at November
30, 1993. GFC is a taxable entity under Subchapter T of the Internal
Revenue Code and accordingly takes tax deductions for allocations of net
margins to its patrons.
In the opinion of management, the accompanying unaudited combined financial
statements contain all adjustments (which consist only of normal recurring
accruals) necessary to present fairly the combined financial position of
CFC, RTFC and GFC as of November 30, 1993 and May 31, 1993, and the
combined results of operations, cash flows and changes in members' equity
for the quarters and six months periods ended November 30, 1993 and 1992.
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<PAGE> 9
The Notes to Combined Financial Statements for the years ended May 31, 1993
and 1992 should be read in conjunction with the accompanying financial
statements. (See CFC's Form 10-K for the year ended May 31, 1993, filed on
August 23, 1993). Certain items on the May 31, 1993 Combined Balance Sheets
have been reclassified to conform with the November 30, 1993 presentation.
Principles of Combination
The accompanying financial statements include the combined accounts of
CFC, RTFC and GFC, after elimination of all material intercompany
accounts and transactions. CFC has a $1,000 membership interest in RTFC
and GFC. CFC exercises control over RTFC and GFC through majority
representation on their Boards of Directors. CFC manages the affairs of
RTFC through a long-term management agreement. CFC services the loans
for GFC for which it collects a servicing fee. As of November 30, 1993,
CFC had committed to lend RTFC up to $1,150.0 million to fund loans to
its members and their affiliates. RTFC had outstanding loans and
unadvanced loan commitments totaling $864.3 million and $598.9 million as
of November 30, 1993 and May 31, 1993, respectively. RTFC's net margins
are allocated to RTFC's borrowers. Summary financial information
relating to RTFC is presented below:
<TABLE>
<CAPTION>
At November 30, At May 31,
1993 1993
(Dollar Amounts In Thousands)
<S> <C> <C>
Outstanding loans to members and
their affiliates $ 489,047 $ 460,864
Total assets 567,821 529,562
Notes payable to CFC 489,047 460,864
Total liabilities 498,486 467,062
Members' Equity and
Subordinated Certificates 69,335 62,500
</TABLE>
<TABLE>
<CAPTION>
For the Six Months Ended November 30,
1993 1992
(Dollar Amounts In Thousands)
<S> <C> <C>
Operating income $ 13,983 $ 14,204
Net margins 898 749
</TABLE>
As of November 30, 1993 and May 31, 1993, CFC had loaned GFC $290.8 million
to fund the purchase of REA guaranteed loans from CFC. Summary financial
information relating to GFC included in the combined financial statements
as of November 30, 1993 and May 31, 1993 and for the six months ended
November 30, 1993 is presented below:
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<PAGE>
<PAGE> 10
<TABLE>
<CAPTION>
At November 30, At May 31,
1993 1993
(Dollar Amounts In Thousands)
<S> <C> <C>
Outstanding loans to members $ 283,560 $ 286,460
Total assets 297,694 300,636
Notes payable to CFC 290,780 294,548
Total liabilities 296,277 299,953
Members' Equity 1,417 683
</TABLE>
<TABLE>
<CAPTION>
For the Six Months ended November 30,
1993 1992
(Dollar Amounts In Thousands)
<S> <C> <C>
Operating income $ 5,625 $ 5,906
Net margins 734 475
</TABLE>
Unless stated otherwise, references to CFC relate to CFC, RTFC and GFC on
a combined basis.
2. Debt Service Account
A provision of the indenture governing the issuance of Collateral Trust
Bonds requires monthly deposits into a debt service account held by the
trustee, generally in amounts equal to one-twelfth of the total annual
interest payments, annual sinking fund payments and the principal amount of
bonds maturing within one year. These deposits may be invested in
permitted investments, as defined in the indenture (generally bank
certificates of deposit and prime rated commercial paper).
3. Loans Pledged as Collateral to Secure Collateral Trust Bonds
As of November 30, 1993 and May 31, 1993, mortgage notes representing
approximately $1,082.3 million and $1,301.7 million, respectively, of
outstanding long-term loans to members were pledged as collateral to secure
CFC's Collateral Trust Bonds. The indenture for Collateral Trust Bonds
requires that CFC pledge eligible mortgage notes (or other permitted
assets) as collateral at least in the amount of the outstanding balance of
Collateral Trust Bonds. Under CFC's revolving credit agreement, CFC cannot
pledge mortgage notes in excess of 150% of Collateral Trust Bonds
outstanding. At November 30, 1993 and May 31, 1993, CFC had Collateral
Trust Bonds outstanding totaling $746.3 million and $895.7 million,
respectively.
4. Allowance for Loan and Guarantee Losses
CFC maintains an allowance for loan and guarantee losses at a level
considered to be adequate in relation to the quality and size of its loans
and guarantees outstanding. It is CFC's policy to review periodically its
loans and guarantees and to make adjustments to the allowance as necessary.
The allowance is based on estimates, and accordingly, actual loan and
guarantee
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<PAGE>
<PAGE> 11
losses may differ from the allowance amount. As of November 30, 1993 and
May 31, 1993, such allowance was $176.3 million and $172.6 million
respectively.
5. Members' Subordinated Certificates
Members' Subordinated Certificates are subordinated obligations purchased
by members as a condition of membership and in connection with CFC's
extension of long-term loans and guarantees to them. Those issued as a
condition of membership (Subscription Capital Term Certificates) generally
mature 100 years from issuance date and bear interest at 5% per annum. The
other certificates either mature 46 to 50 years from issuance or amortize
proportionately with the credit extended, and either are non-interest-
bearing or bear interest at varying rates.
The proceeds from certain non-interest-bearing subordinated certificates
issued in connection with CFC's guarantees of tax-exempt bonds are pledged
by CFC to the debt service reserve fund established in connection with the
bond issue, and any earnings from the investment of the fund inure solely
to the benefit of the member.
6. Credit Arrangements
As of November 30, 1993 and May 31, 1993, CFC had two revolving credit
agreements totaling $2,900.0 million with 52 banks, including Morgan
Guaranty Trust Company of New York as Administrative Agent and Arranger and
the Bank of Nova Scotia as Managing Agent. These credit facilities were
arranged principally to provide liquidity support for CFC's outstanding
commercial paper and the adjustable or floating/fixed rate bonds which CFC
has guaranteed and agreed to purchase for the benefit of its members.
Under the respective revolving credit agreements, CFC can borrow up to
$2,030.0 million until June 3, 1996 (the "three-year facility"), and $870.0
million until May 27, 1994 (the "365-day facility"). Any amounts
outstanding will be due on those dates. In connection with the three-year
facility, CFC pays a per annum facility/commitment fee of .225 of 1%. The
per annum facility fee for the 364-day facility is .15 of 1%. If CFC's
short-term ratings decline, these fees may be increased by no more than
.2125 of 1%. Borrowings under both agreements will be at one or more rates
as defined in the agreements, as selected by CFC.
The revolving credit agreements require CFC, among other things to maintain
Members' Equity and Members' Subordinated Certificates of at least $1,329.7
million (increased each fiscal year by 90% of net margins not distributed
to members), an average fixed charge coverage ratio over the six most
recent fiscal quarters of at least 1.025 and prohibits the retirement of
patronage capital unless CFC has achieved a fixed charge coverage ratio of
at least 1.05 for the preceding fiscal year. The credit agreements
prohibit CFC from incurring senior debt (including guarantees but excluding
indebtedness incurred to fund REA guaranteed loans) in an amount in excess
of ten times the sum of Members' Equity and subordinated debt and
restricts, with certain exceptions, the creation by CFC of liens on its
assets and certain other conditions to borrowing. Provided that, CFC is in
compliance with these financial covenants
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<PAGE>
<PAGE> 12
(including that CFC has no material contingent or other liability or
material litigation that were not disclosed by or reserved against in its
most recent annual financial statements) and is not in default, CFC may
borrow under the agreenents until the termination date. As of November 30,
1993 and May 31, 1993, CFC was in compliance with all covenants and
conditions.
As of November 30, 1993 and May 31, 1993, there were no borrowings
outstanding under the revolving credit agreements. At November 30, 1993
and May 31, 1993, CFC reclassified $2,030.0 million of its notes payable
outstanding as long-term debt. CFC expects to maintain more than $2,030.0
million of notes payable outstanding during the next twelve months. If
necessary, CFC can refinance such notes payable on a long-term basis by
borrowing under the three-year facility, subject to the conditions therein.
7. Unadvanced Loan Commitments
As of November 30, 1993 and May 31, 1993, CFC had unadvanced loan
commitments, summarized by type of loan, as follows:
<TABLE>
<CAPTION>
(Dollar Amounts In Thousands)
November 30, 1993 May 31, 1993
<S> <C> <C>
Long-term $ 983,517 $ 1,075,386
Intermediate-term 345,903 380,819
Short-term 2,709,797 2,605,047
Telecommunications 375,289 138,074
Associate Member 52,024 57,649
Nonperforming 23,500 23,500
Restructured 20,000 26,500
Total unadvanced loan
commitments $ 4,510,030 $ 4,306,975
</TABLE>
Unadvanced commitments include loans approved by CFC for which loan
contracts have not yet been executed and for which loan contracts have been
executed but funds have not been advanced. CFC may require additional
information to assure itself that all conditions for advance of funds have
been fully met and that there has been no material change in the member's
condition as represented in the documents supplied to CFC. Since
commitments may expire without being fully drawn upon, the total amounts
reported as commitments do not necessarily represent future cash
requirements. Collateral and security requirements for loan commitments
are identical to those for advanced loans.
8. Retirement of Patronage Capital
Patronage capital in the amount of $28.0 million was retired on August 2,
1993, representing CFC's 1987 allocations. Patronage capital allocated
with respect to prior fiscal years was retired previously.
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<PAGE>
<PAGE> 13
Future retirements of patronage capital allocated to patrons may be made as
determined by CFC's Board of Directors with due regard for CFC's financial
condition.
9. Guarantees
As of November 30, 1993 and May 31, 1993, CFC had guaranteed the following
contractual obligations of its members:
<TABLE>
<CAPTION>
(Dollar Amounts In Thousands)
November 30, 1993 May 31, 1993
<S> <C> <C>
Long-term tax-exempt bonds (A) $ 1,534,150 $ 1,576,230
Debt portions of leveraged lease
transactions (B) 662,190 670,463
Indemnifications of tax benefit
transfers (C) 425,685 436,860
Other guarantees (D) 131,608 130,178
Total guarantees $ 2,753,633 $ 2,813,731
</TABLE>
(A) CFC has unconditionally guaranteed to the holders or to trustees for
the benefit of holders of these bonds the full principal, premium (if
any) and interest payments on each bond when due. In the event of
default, the bonds cannot be accelerated as long as CFC makes the
scheduled debt service payments. 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. Of the amounts shown, $1,172.0
million and $1,120.8 million as of November 30, 1993 and May 31, 1993,
respectively, are adjustable or floating/fixed rate bonds. The
interest rate on such bonds may be converted to a fixed rate as
specified in the indenture for each bond offering. During the
variable rate period (including at the time of conversion to a fixed
rate), CFC has unconditionally agreed to purchase bonds tendered or
called for redemption if such bonds are not sold to other purchasers
by the remarketing agents.
(B) CFC has unconditionally guaranteed the repayment of debt raised by
National Cooperative Services Corporation ("NCSC") for leveraged lease
transactions.
(C) CFC has unconditionally guaranteed to lessors certain indemnity
payments which may be required to be made by the lessees in connection
with tax benefit transfers. The amounts of such guarantees reach a
maximum and then decrease over the life of the lease. Although one
lease is currently not at its maximum, the maximum aggregate amount
guaranteed by CFC will continue to decrease over the remaining lives
of the leases. The maximum at November 30, 1993 was $429.3 million.
(D) At November 30, 1993 and May 31, 1993, CFC had unconditionally
guaranteed commercial paper, along with the related interest rate
exchange agreement, issued by NCSC of $34.9 million and $35.5 million.
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<PAGE>
<PAGE> 14
10. Interest Rate Exchange Agreements
As of November 30, 1993 and May 31, 1993, CFC had $130.0 million
outstanding in interest rate exchange agreements. Under these agreements,
CFC pays fixed rates of interest and receives interest based on floating
rates, the net result of which is included in the cost of funds.
11. Contingencies
(A) At November 30, 1993 and May 31, 1993, nonperforming loans in the
amount of $54.5 million and $55.8 million, respectively, were on a
nonaccrual basis with respect to interest income. At November 30,
1993 and May 31,
1993, the total amount of restructured debt was $156.2 million and
$172.9 million, respectively. CFC elected to apply all principal and
interest payments received against outstanding amounts on restructured
debt of $85.3 million and $100.3 million, respectively. At November
30, 1993 and May 31, 1993, CFC had committed to lend $23.5 million and
$23.5 million, and $20.0 million and $26.5 million to nonperforming
and restructured borrowers, respectively.
B) On May 23, 1985, Wabash Valley Power Association, Inc. ("WVPA") filed
a voluntary petition for reorganization under Chapter 11 of the U.S.
Bankruptcy Code in connection with the canceled Marble Hill plant
construction.
On August 7, 1991, the Bankruptcy Court confirmed WVPA's
reorganization plan pending approval of rates as contemplated in the
plan. WVPA's plan is currently under appeal by REA. Depending on the
final terms of a plan of reorganization, CFC could be obligated to pay
REA a pro-rata amount (estimated at 78%) of the debt service payments
plus interest made by WVPA on the $25 million in tax-exempt bonds
since the bankruptcy petition date.
In May 1993, CFC advanced a $24.4 million variable interest rate
secured loan to WVPA, which was used to effect an early redemption of
the tax-exempt bonds guaranteed by CFC. As WVPA is operating under
the Bankruptcy Court, CFC has placed this loan on a non-accrual basis
with respect to interest income recognition. The loan is classified
as nonperforming. As of November 30, 1993, $23.8 million was
outstanding to WVPA.
Based on WVPA's preliminary reorganization plan, management believes
that CFC has adequately reserved for any potential loss.
(C) Deseret Generation & Transmission Co-operative ("Deseret") and its
major creditors entered into an Agreement Restructuring Obligations
("ARO") document that restructured Deseret's debt obligation to REA,
CFC and certain other creditors, including certain lease payments due
on the Bonanza Power Plant. The ARO, which closed in January 1991
with an effective date of January 1, 1989, provides for the reduction
of Deseret's debt service and rental obligations on the Bonanza Power
Plant until 1996 when large sales of power are intended to commence.
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<PAGE>
<PAGE> 15
However, these sales of power are largely contingent upon market
supply/demand factors for power and the competitive cost of delivered
power, as well as the construction/availability of transmission
facilities and/or other options available to potential purchasers.
Under the ARO assumptions, CFC expects to fund Deseret's cash flow
shortfalls estimated to total $117 million until at least 1996 under
its various guarantees of debt obligations. Deseret's ability to
generate enough cash flow to service its current debt and rental
payments as well as to begin repayment of the shortfall funded by CFC
thereafter depends on whether it is able to make the large power sales
on which the ARO is premised. Since the ARO, Deseret's cash flow
projections have been revised to reflect a more current expectation of
power sales. As a result of these changes, Deseret is expected to be
unable to satisfy its payment obligations under the ARO in 1996. If
payments are not made according to the ARO, the ARO will be amended or
CFC may exercise its remedies under its various guarantees. At
November 30, 1993, CFC had funded $67.6 million of the shortfall.
In addition to or in lieu of power sales as contemplated in the ARO,
Deseret is currently negotiating the terms for the sale of its
interest in the Hunter II coal fired plant. Any sale of the plant
must be approved by CFC.
CFC has placed all loans to Deseret on a nonaccrual basis with respect
to interest income recognition. CFC does not anticipate interest
income recognition on the outstanding loans until Deseret's power
sales produce cash flow sufficient to service all debts.
As part of a separate agreement, in conjunction with the ARO, CFC will
be obligated to repay out of payments by Deseret $25.9 million (plus
interest) received from a party to the Bonanza Lease transaction to
cover shortfalls in the July 1989, January 1990 and July 1990 lease
payments which were funded by that party. This amount will be repaid
after the available annual cashflow exceeds the debt repayment
requirements as defined in the ARO (i.e., CFC is no longer required to
fund a shortfall).
As of November 30, 1993, CFC had approximately $446.7 million in
current credit exposure on behalf of Deseret consisting of $85.3
million in secured loans, and $361.4 million for secured guarantees by
CFC of various direct and indirect obligations of Deseret. CFC's
guarantees include $9.8 million in tax-benefit indemnifications, $13.2
million for tax-exempt bonds and $39.2 million relating to mining
equipment for a coal supplier of Deseret. The remainder of CFC's
guarantee is for semiannual debt service payments on $299.2 million of
bonds issued in a $655 million leveraged lease financing of a
generating station in 1985. Under the ARO, CFC has also provided
Deseret a $20.0 million five-year senior secured line of credit. At
November 30, 1993, there was no balance outstanding under this line of
credit.
CFC believes that given the underlying collateral value and the terms
of the ARO, it has adequately reserved for any potential loss on its
loans and guarantees to Deseret.
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(D) Soyland Power Cooperative ("Soyland") has been experiencing cash flow
shortfalls due to an inability to raise wholesale rates to a level
sufficient to cover all debt service payments and operating expenses.
During the past year, CFC provided Soyland $30 million in senior
secured lines of credit to help alleviate the shortfalls.
On December 17, 1993, Soyland and its secured creditors, CFC and REA,
completed a long-term debt restructuring to alleviate Soyland's
expected long-term cash flow shortfalls.
The key terms of the restructuring are that CFC will provide a 10
year, $30 million senior secured line of credit as well as a senior
secured $30 million construction loan for projects in the next five
years. CFC believes that given the underlying collateral value of its
secured loans to Soyland, it has adequately reserved for any potential
loss on its existing loans and no losses are anticipated on the new
senior secured loans CFC is proposing to make.
At November 30, 1993, CFC had $49.4 million in outstanding long-term
loans to Soyland which were secured equally and ratably with the REA
on all assets and future revenues of Soyland. In addition, CFC had
advanced $30.0 million in senior secured lines of credit under the
restructure agreement. These lines of credit are to be paid before
all other secured debt. CFC also had $387.5 million in loans to
Soyland which are guaranteed by the U.S. Government.
12. Loans Guaranteed by REA
At November 30, 1993, CFC held $488.6 million in Trust Certificates related
to the refinancings of Federal Financing Bank loans. These Trust
Certificates are supported by payments from certain CFC Power Supply
members whose payments are guaranteed by the United States Government
acting through REA.
13. Extraordinary Loss
For the six months ended November 30, 1992, CFC recorded an extraordinary
loss of $3.16 million for the optional prepayment premium related to the
early retirement of 9.75%, Series F Collateral Trust Bonds which was
effected on September 3, 1992.
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Part I. Item 2.
Management's Discussion and Analysis of Financial
Condition and Results of Operations
Changes in Financial Condition
Total assets increased by $275.1 million, or 5.0%, to $5,739.2 million at
November 30, from $5,464.1 million at May 31. This increase was due to a $298.8
million or 5.8% increase in net loans outstanding to members from $5,112.5 at
May 31, to $5,411.3 at November 30. The amount of CFC's other assets were
generally stable with the exception of an $11.6 million decrease to cash and
marketable securities and a $5.1 million decrease in the debt service account.
At November 30, net loans comprised 94.3% of total assets, compared to 93.6% at
May 31. Long-term loans were 86.0% of gross loans at November 30, compared to
89.2% at May 31. At November 30, 44.6% of long-term loans carried a fixed
interest rate, while the remaining 55.4% had rates that were adjusted monthly
or semi-monthly, compared to 44.4% with a fixed rate at May 31. FFB refinancing
loans, which are guaranteed by the United States Government, increased by $190.9
million to $488.6 million at November 30, from $297.7 million at May 31. Loans
guaranteed by the United States Government represented 8.7% of gross loans at
November 30, compared to 5.6% at May 31. Nonperforming and restructured loans
represented 3.8% of gross loans at November 30 and 4.3% of gross loans at May
31. At November 30, $214.7 million or 3.8% of gross loans were unsecured,
compared to $199.2 million and 3.8% at May 31. Substantially all other loans
were secured pro-rata with other lenders (primarily REA), by all assets and
future revenues of the borrower.
As of November 30, CFC had provided $2,753.6 million in guarantees to its
members, a decrease of $60.1 million from $2,813.7 million at May 31. This
decrease was due to the defeasance and replacement of a $22.1 million tax-exempt
financing with a long-term loan for one member and to the defeasance and
replacement with new financing of four other tax-exempt issues for a net
decrease of $8.2 million. The remaining $29.8 million was due to scheduled
payments and lease obligation reductions. All guarantees are secured on a pro-
rata basis with other creditors on all assets and future revenues of the
borrower or by the underlying financed assets.
CFC's top ten borrowers had $2,520.7 million of loans and guarantees outstanding
at November 30. No single borrower had more than 5.5% of the total credit
exposure. By policy, CFC limits its credit exposure, loans and guarantees, to
any one borrower.
At November 30, CFC had committed to lend $4,510.0 million, an increase of
$203.0 million over the $4,307.0 million it had committed to lend at May 31.
This increase is due to recent loans approved for telecommunication system
members. These loans will be used to finance the purchase of properties, by
RTFC members, from two large telecommunication companies that have been
divesting their holdings. Most unadvanced commitments contain a material
adverse change clause. Because much of CFC's commitments are provided for
operational backup liquidity, CFC does not anticipate funding the total
outstanding amount.
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During the six months ended November 30, total liabilities and members' equity
increased by $275.1 million or 5.0%. The increase was due to an increase of
$431.7 million in notes payable, offset by a $152.9 million decrease in long-
term debt outstanding. The increase in notes payable was required to fund the
increase in loans outstanding and to effect the early redemption of the series
Q collateral trust bonds in June.
The allowance for loan and guarantee losses increased by $3.7 million from
$172.6 million at May 31, to $176.3 million at November 30. At November 30, the
allowance represented 3.2% of gross loans, 323.5% of nonperforming loans and
83.7% of nonperforming and restructured loans. The allowance is periodically
reviewed by management for adequacy. In performing this assessment, management
considers various factors including an analysis of the financial strength of
CFC's borrowers, delinquencies, loan charge-off history, underlying collateral
and economic and industry conditions. As of November 30, management believes
that the allowance for loan and guarantee losses is adequate to cover any
portfolio losses which have occurred or may occur.
In late July 1993, REA selected borrowers that would be eligible to apply for
up to $350.0 million in principal repayments on their FFB loans, without
penalty. During the six months ended November 30, CFC has made $193.7 million
in loans to two members for such repayments. It is anticipated that an
additional loan will be made early in calendar 1994.
On September 16, 1993, the REA published preliminary regulations governing the
prepayment of existing REA loans at a discount based on the government's cost
of capital. While the comment period ended October 18, 1993, final regulations
have not yet been issued. Some of CFC's members have expressed an interest in
this program, but until final regulations have been issued, it is difficult for
the members to evaluate the benefits of pursuing a buyout of their REA notes,
and it is difficult for CFC to predict the volume of loans it would expect to
make under such a program.
Changes in Results of Operations
CFC's net margins are subject to change as interest rates change. Therefore,
CFC uses an interest coverage ratio, instead of the dollar amount of gross or
net margins, as a primary performance indicator. During the six months ended
November 30, 1993, CFC achieved a Times Interest Earned Ratio ("TIER") of 1.20,
an increase over the 1.14 for the six months ended November 30, 1992. TIER for
the six months ended November 30, 1992, was adversely affected by an
extraordinary loss for the early redemption of the series F collateral trust
bonds. In addition, the provision
for loan and guarantee losses for the six months ended November 30, 1992 was
$7.5 million, compared to $3.7 million for the six months ended November 30,
1993. TIER achieved excluding the extraordinary loss and the loan and guarantee
loss provision would have been 1.23 and 1.20 for the six months ended November
30, 1993 and 1992, respectively.
During the six months ended November 30, 1993, CFC was able to reduce its total
operating expenses and provision for loan and guarantee losses by 18 basis
points ("bp"- cost expressed as a percentage of average loans outstanding) from
62 bp at November 30, 1992 to 44 bp at November 30, 1993. This reduction was
due primarily
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<PAGE> 19
to the above mentioned reduction in the loan and guarantee loss provision, an
increase in loans outstanding and a reduction in departmental operating expenses
from 32 bp at November 30, 1992 to 30 bp at November 30, 1993. Another factor
contributing to the increased TIER was an increase in nonoperating income of
$0.9 million to $2.4 million for the six months ended November 30, 1993,
compared to $1.5 million for the six months ended November 30, 1992. The
reduction in expenses and the increase in nonoperating income were offset by a
15 bp reduction in gross margins from 145 bp at November 30, 1992 to 130 bp at
November 30, 1993. The reduction in gross margins is a result of CFC passing on
the cost savings obtained by the early redemption of high cost collateral trust
bonds and to the economies of scale available to a larger loan portfolio.
TIER for the quarters ended November 30, 1993 and 1992 were 1.19 and 1.17,
respectively. TIER excluding the loan and guarantee loss provision would have
been 1.22 and 1.23 for the quarters ended November 30, 1993 and 1992,
respectively.
Liquidity and Capital Resources
At November 30, CFC had $2,900 million in available credit, $2,030 million of
which was available until May 1996 and $870 million available until May 1994.
As of November 30, CFC was in compliance with all covenants and conditions to
borrowing. In addition, CFC had $95 million of short-term bank lines of credit
available at November 30.
As of November 30, CFC had SEC shelf registrations for Collateral Trust Bonds
and Medium-Term Notes for $300.0 million and $444.8 million, respectively.
Member invested funds, including the loan and guarantee loss allowance, at
November 30, were $2,966.7 million or 51.0% of CFC's total capitalization
compared to $2,961.8 million or 53.5% at May 31, 1993 (long- and short-term debt
outstanding, members' certificates and equity and the loan loss reserve). The
dollar amount of member invested funds has remained fairly constant over the six
months ended November 30, but the increase in loans outstanding funded primarily
with dealer commercial paper has caused a decrease in the percentage of member
invested funds to total capitalization.
CFC's leverage ratio was 4.43 at November 30, an increase over the 4.41 reported
at May 31. The increase in the leverage ratio was due to the increase in short-
term debt required to fund the increase in loans outstanding and the retirement
of $28.0 million in patronge capital certificates in August offset by fiscal
year to date net margins of $25.6 million.
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Part II
Item 1, Legal Proceedings.
None.
Item 2, Changes in Securities.
None.
Item 3, Defaults upon Senior Securities.
None.
Item 4, Submission of Matters to a Vote of Security Holders.
None.
Item 5, Other Information.
None.
Item 6, A. Exhibits
None.
B. Reports on Form 8-K.
None.
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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
Assistant Secretary-Treasurer and
Chief Financial Officer
January 14, 1994
/s/ Angelo M. Salera
Controller (Principal Accounting Officer)
January 14, 1994
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