<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 August 31, 1994
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period From To
Commission File 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> 2
<TABLE>
<CAPTION>
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
COMBINED BALANCE SHEETS
(Dollar Amounts In Thousands)
A S S E T S
(Unaudited)
August 31, 1994 May 31, 1994
<S> <C> <C>
Cash $ 21,607 $ 22,168
Marketable Securities 20,000 _
Debt Service Investments 40,439 33,668
Loans To Members, net 6,250,734 5,921,022
Receivables 90,528 90,160
Fixed Assets, net 38,489 38,718
Debt Service Reserve Funds 111,083 107,095
Other Assets 8,043 11,465
Total Asset $ 6,580,923 $ 6,224,296
The accompanying notes are an integral part of these combined financial statements.
</TABLE>
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<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)
August 31, 1994 May 31, 1994
<S> <C> <C>
Notes Payable, due within one year $ 1,877,690 $ 1,607,975
Accounts Payable 45,468 18,529
Accrued Interest Payable 44,083 35,597
Long-Term Debt 3,102,208 3,042,068
Other Liabilities 33,242 36,301
Commitments, Guarantees and Contingencies
(Notes 7, 9, 10 and 11)
Members' Subordinated Certificates:
Membership subscription certificates 640,520 640,520
Loan and guarantee certificates 595,953 582,338
Total Members' Subordinated Certificates 1,236,473 1,222,858
Members' Equity 241,759 260,968
Total Members' Subordinated Certificates
and Members' Equity 1,478,232 1,483,826
Total Liabilities and Members' Equity $ 6,580,923 $ 6,224,296
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 Ended August 31, 1994 and 1993
1994 1993
<S> <C> <C>
Operating Income - Interest on loans to members $ 97,985 $ 80,496
Less--Cost of funds allocated 78,487 63,448
Gross operating margin 19,498 17,048
Expenses:
General, administrative and loan processing 3,683 3,916
Provision for loan and guarantee losses (Note 4) 1,875 1,875
Total expenses 5,558 5,791
Operating margin 13,940 11,257
Nonoperating Income 511 1,899
Net Margins $ 14,451 $ 13,156
The accompanying notes are an integral part of these combined financial statements.
</TABLE>
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<TABLE>
<CAPTION>
(UNAUDITED)
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
COMBINED STATEMENTS OF CHANGES IN MEMBERS' EQUITY
(Dollar Amounts In Thousands)
For the Quarters Ended August 31, 1994 and 1993
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 August 31, 1994
Balance at May 31, 1994 $260,968 $ 1,339 $ 325 $ 2,289 $ 495 $256,520
Retirement of patronage capital (33,701) - - - (177) (33,524)
Net Margins 14,451 - - 14,451 - -
Other 41 13 28 - - -
Balance at August 31, 1994 $241,759 $ 1,352 $ 353 $ 16,740 $ 318 $222,996
Quarter Ended August 31, 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 13,156 - - 13,156 - -
Other 185 30 1 (1) - 155
Balance at August 31, 1993 $ 243,656 $ 1,277 $ 313 $ 15,444 $ 193 $226,429
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 CASH FLOWS
(Dollar Amounts In Thousands)
For the Quarters Ended August 31, 1994 and 1993
1994 1993
<S> <C> <C>
Cash Flows From Operating Activities:
Accrual basis net margins $ 14,451 $ 13,156
Add (deduct):
Provision for loan and guarantee losses 1,875 1,875
Depreciation 385 830
Amortization of deferred income (4,402) (4,051)
Add (deduct) changes in accrual accounts:
Receivables (251) 7,145
Accounts payable 26,939 (1,140)
Accrued interest payable 8,486 (849)
Other 5,958 4,506
Net cash flows provided by operating activities 53,441 21,472
Cash Flows From Investing Activities:
Advances made on loans (1,046,142) (367,707)
Principal collected on loans 714,555 270,584
Investments in fixed assets (156) (119)
Net cash flows used in investing activities (331,743) (97,242)
Cash Flows From Financing Activities:
Notes payable, net 269,715 233,351
Debt service investments, net (26,771) 238
Proceeds from issuance of Long-Term Debt 79,993 28,176
Payments for retirement of Long-Term Debt (19,892) (181,970)
Proceeds from issuance of Members' Subordinated
Certificates 10,714 6,442
Payments for retirement of Members' Subordinated
Certificates (1,214) (2,767)
Payments for retirement of patronage capital (34,804) (27,050)
Net cash flows provided by financing activities 277,741 56,420
Net Cash Flows (561) (19,350)
Beginning Cash and Cash Equivalents 22,168 55,450
Ending Cash and Cash Equivalents $ 21,607 $ 36,100
Supplemental Disclosure of Cash Flow Information:
Cash paid during quarter for interest $ 70,524 $ 64,563
The accompanying notes are an integral part of these combined financial statements.
</TABLE>
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<PAGE> 7
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
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 1,040 members as of August 31, 1994, included 899 rural electric
utility system members ("Utility Members"), virtually all of which are
consumer-owned cooperatives, 71 service members and 70 associate members.
The Utility Members included 833 distribution systems and 66 generation and
transmission systems operating in 46 states and U.S. territories. At
December 31, 1993, CFC's member systems served approximately 12.4 million
consumers, representing service to an estimated 32.5 million ultimate users
of electricity and owned approximately $62.6 billion (before depreciation
of $17.9 billion) in total utility plant.
Rural Telephone Finance Cooperative ("RTFC") was incorporated as a private
cooperative association in the State of South Dakota in September 1987.
RTFC is a controlled affiliate of CFC and was created for the purpose of
providing, 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 August 31, 1994, RTFC had
363 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 five members other than CFC at August
31, 1994. GFC is a taxable entity under Subchapter T of the Internal
Revenue Code and accordingly takes deductions for allocations of net margins
to its patrons.
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 August 31, 1994 and May 31, 1994, and the combined
results of operations, cash flows and changes in members' equity for the
quarters ended August 31, 1994 and 1993.
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The Notes to Combined Financial Statements for the years ended May 31, 1994
and 1993 should be read in conjunction with the accompanying financial
statements. (See CFC's Form 10-K for the year ended May 31, 1994, filed on
August 25, 1994). Certain items on the May 31, 1994 Combined Balance Sheets
have been reclassified to conform with the August 31, 1994 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 August 31, 1994, CFC had committed to lend RTFC up
to $1,800.0 million to fund loans to its members and their affiliates. RTFC
had outstanding loans and unadvanced loan commitments totaling $1,141.4
million and $1,135.4 million as of August 31, 1994 and May 31, 1994,
respectively. RTFC's net margins are allocated to RTFC's borrowers.
Summary financial information relating to RTFC is presented below:
<TABLE>
<CAPTION>
At August 31, At May 31,
1994 1994
(Dollar Amounts In Thousands)
<S> <C> <C>
Outstanding loans to members and
their affiliates $778,801 $653,644
Total assets 881,830 743,761
Notes payable to CFC 780,559 653,644
Total liabilities 792,532 663,810
Members' Equity and
Subordinated Certificates 89,298 79,951
</TABLE>
<TABLE>
<CAPTION>
For the Quarters Ended August 31,
1994 1993
(Dollar Amounts In Thousands)
<S> <C> <C>
Operating income $10,678 $7,011
Net margins 479 397
</TABLE>
As of August 31, 1994 and May 31, 1994, CFC had loans outstanding to GFC of
$524.1 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 August 31, 1994 and May 31, 1994 and for the
quarter ended August 31, 1994 and 1993 is presented below:
-8-
<PAGE> 9
<TABLE>
<CAPTION>
At August 31, At May 31,
1994 1994
(Dollar Amounts In Thousands)
<S> <C> <C>
Outstanding loans to members $524,081 $524,081
Total assets 540,982 540,913
Notes payable to CFC 531,302 531,302
Total liabilities 540,240 539,521
Members' Equity 742 1,392
</TABLE>
<TABLE>
<CAPTION>
For the Quarters ended
August 31, August 31,
1994 1993
(Dollar Amounts In Thousands)
<S> <C> <C>
Operating income $ 6,843 $2,817
Net margins 710 292
</TABLE>
Unless stated otherwise, references to CFC relate to CFC, RTFC and GFC on
a combined basis.
2. Debt Service Account
on February 15, 1994, CFC completed a new Collateral Trust Bond Indenture
("1994 Indenture") with First Bank National Association as trustee. This
indenture does not require the maintenance of a debt service account. CFC's
indenture with Chemical Bank as trustee, dated December 1, 1972, ("1972
Indenture"), does require the maintenance of a debt service account. All
future Collateral Trust Bonds will be issued under the 1994 Indenture.
A provision of the 1972 Indenture 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 August 31, 1994 and May 31, 1994, mortgage notes representing
approximately $710.9 million and $717.8 million, respectively, of
outstanding long-term loans to members were pledged as collateral to secure
CFC's Collateral Trust Bonds pledged under the 1972 Indenture and no amounts
pledged under the 1994 Indenture. Both the 1972 Indenture and the 1994
Indenture for Collateral Trust Bonds require 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 August 31, 1994 and May 31,
1994, CFC had Collateral Trust Bonds outstanding totaling $539.9 million all
issued under the 1972 Indenture.
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<PAGE> 10
Subsequent to the end of the first quarter, CFC issued $150 million in
variable rate Collateral Trust Bonds, Series 1994-A, due 1996. These bonds
were issued under the 1994 Indenture. Along with this bond issue, CFC
pledged $222.8 million of mortgage notes as collateral.
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 losses may differ from the allowance amount. As of August 31,
1994 and May 31, 1994, such allowance was $190.1 million and $188.2 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 August 31, 1994 and May 31, 1994, 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 26, 1995 (the "364-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.
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<PAGE> 11
The revolving credit agreements require CFC, among other things to maintain
Members' Equity and Members' Subordinated Certificates of at least $1,334.4
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 certificates and restricts, with
certain exceptions, the creation by CFC of liens on its assets and certain
other conditions to borrowing. The agreement also prohibits CFC from
pledging collateral in excess of 150% of the principal amount of Collateral
Trust Bonds outstanding. Provided that, CFC is in compliance with these
financial covenants (including that CFC has no material contingent or other
liability or material litigation 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 agreements until the termination date.
As of August 31, 1994 and May 31, 1994, CFC was in compliance with all
covenants and conditions.
As of August 31, 1994 and May 31, 1994, there were no borrowings outstanding
under the revolving credit agreements. At August 31, 1994 and May 31, 1994,
CFC classified $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.
In addition to the revolving credit facilities at August 31, 1994 and May
31, 1994, CFC had $610.0 million in separately negotiated 364-day lines of
credit, documented by a uniform line of credit agreement for which a
commitment fee of .10 of 1% is paid. The line of credit agreement contains
the same financial covenants as the revolving credit agreements and may be
terminated upon 30 days notice by either party. After such notice the bank
would not be obligated to lend.
7. Unadvanced Loan Commitments
As of August 31, 1994 and May 31, 1994, CFC had unadvanced loan commitments,
summarized by type of loan, as follows:
<TABLE>
<CAPTION>
(Dollar Amounts In Thousands)
August 31, 1994 May 31, 1994
<S> <C> <C>
Long-term $1,298,723 $1,375,078
Intermediate-term 273,804 275,072
Short-term 3,071,072 2,992,023
Telecommunications 363,546 481,744
Associate Member 59,935 63,613
Nonperforming 10,000 -
Restructured 20,000 20,000
Total unadvanced loan
commitments $5,097,080 $5,207,530
</TABLE>
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<PAGE> 12
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 resented 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 $33.7 million was retired on August 31,
1994, representing one-sixth of the total allocations for fiscal years 1988,
1989 and 1990 and one-half of the allocation for fiscal year 1994. Future
retirements of patronage capital allocated to patrons may be made annually
as determined by CFC's Board of Directors with due regard for CFC's
financial condition.
9. Guarantees
As of August 31, 1994 and May 31, 1994, CFC had guaranteed the following
contractual obligations of its members:
<TABLE>
<CAPTION>
(Dollar Amounts In Thousands)
August 31, 1994 May 31, 1994
<S> <C> <C>
Long-term tax-exempt bonds (A) $1,488,231 $1,494,200
Debt portions of leveraged lease
transactions (B) 631,319 646,472
Indemnifications of tax benefit
transfers (C) 405,056 414,512
Other guarantees (D) 100,801 100,643
Total guarantees $2,625,407 $2,655,827
</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, $1,211.0 million and $1,214.6
million as of August 31, 1994 and May 31, 1994, 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.
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<PAGE> 13
(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.
(D)At August 31, 1994 and May 31, 1994, CFC had unconditionally guaranteed
commercial paper, along with the related interest rate exchange agreement,
issued by NCSC of $34.8 million and $34.8 million, respectively.
10. Interest Rate Exchange Agreements
As of August 31, 1994 and May 31, 1994, 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 August 31, 1994 and May 31, 1994, nonperforming loans in the amount of
$43.2 million and $44.9 million, respectively, were on a nonaccrual basis
with respect to interest income. At August 31, 1994 and May 31, 1994, the
total amount of restructured debt was $179.5 million and $165.4 million,
respectively. CFC elected to apply all principal and interest payments
received against principal outstanding on restructured debt of $125.6
million and $111.5 million, respectively. At August 31, 1994 and May 31,
1994, CFC had committed to lend $10.0 million and $0.0 million to
nonperforming borrowers, and $20.0 million and $20.0 million to
restructured borrowers, respectively. At May 31, 1994 CFC reported a
total of $53.0 million of unadvanced commitments to restructured
borrowers, $33.0 million of which is on a super secured basis and has been
reclassified in Note 7.
(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. 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 $25 million in tax-exempt bonds since the
bankruptcy petition date.
On June 22, 1994, the U.S. District Court affirmed (over REA's objection)
the Wabash plan in reorganization. REA has filed a notice of appeal.
Wabash plans to present for approval by the Bankruptcy Court a priority
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<PAGE> 14
credit facility from CFC in the amount of $10.0 million. A hearing is
scheduled for late October. REA is expected to object and appeal if
Wabash prevails. Under the Wabash plan, CFC would realize an estimated
total loss of approximately $12 million ($8.6 million of which has been
written off to date), after the offset of subordinated capital term
certificates (without taking into account interest since the petition
date). CFC and REA have agreed to distribute all settlement proceeds from
Wabash in compliance with provisions under the shared mortgage. Upon
resolution of the bankruptcy there will be a final accounting of the cash
flow subsequent to the petition date. At this time it is anticipated that
this final accounting will result in CFC making a net payment to REA to
true-up the cash distribution between REA and CFC.
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 August 31, 1994, $22.5 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.
Under the ARO assumptions, CFC expects to fund Deseret's cash flow
shortfalls until at least 1996 under its various guarantees of debt
obligations. Deseret's ability to generate enough cash flow to service
its current debt and rental payments as well as to begin repayment of the
shortfall funded by CFC thereafter depends on whether it is able to make
the large power sales on which the ARO is premised. Due to changes in
power demands of Deseret's distribution system members and the resulting
reduction in power available for sale at higher prices to nonmembers, as
well as an inability so far, to complete the intended power sales,
Deseret's cash flow projections have undergone revision since the closing
of the ARO. As a result of these changes, Deseret is expected to be
unable to satisfy its payment obligations under the ARO within the next
two years. Under the ARO, CFC expected to fund Deseret's cash flow
shortfalls totaling $117 million and expected a maximum exposure of $439
million in 1996. At August 31, 1994, CFC had funded $108.0 million of the
shortfall. CFC's current exposure of $455.9 million is greater than the
expected maximum from the ARO because it loaned Deseret funds for the
early redemption, at a premium, of two high interest rate bond issues.
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<PAGE> 15
On April 25, 1994, Deseret announced that it had entered into an agreement
with TriState G&T and PacifiCorp to study the possible acquisition of
Deseret's assets. This agreement has now been changed to reflect that
Deseret is now undertaking a request for proposal from any party for the
purchase of power, assets or the entire Deseret System. These proposals
are expected to be received in early 1995.
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 if the
available annual cash flows were to exceed the debt repayment requirements
as defined in the ARO (i.e., CFC is no longer required to fund a
shortfall).
As of August 31, 1994, CFC had approximately $455.9 million in current
credit exposure on behalf of Deseret consisting of $125.6 million in
secured loans, and $330.3 million for guarantees by CFC of various direct
and indirect obligations of Deseret. CFC's guarantees include $9.1
million in tax-benefit indemnifications and $30.6 million relating to
mining equipment for a coal supplier of Deseret. The remainder of CFC's
guarantee is for semiannual debt service payments on $290.6 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 August 31, 1994,
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.
(D)As a consequence of high costs associated with its involvement with the
Clinton Nuclear Station, Soyland Power Cooperative ("Soyland") charged
costs for wholesale power which resulted in its member's retail rates
being uncompetitive. This situation resulted in revenues which were
inadequate to service its debt. Soyland, REA and CFC entered into a debt
restructuring agreement, dated as of December 15, 1994, which restructured
Soyland's indebtedness to REA. As part of this agreement, CFC agreed to
extend additional credit to Soyland in the form of a $30 million revolving
credit facility and a $30 million loan for capital additions. The
revolving credit loan and the capital additions loan have priority in
payment over the existing REA loans and the prior CFC loan. During the
past year, CFC provided Soyland $30 million in senior secured lines of
credit to help alleviate the shortfalls.
-15 -
<PAGE> 16
At August 31, 1994, 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 $8.4 million
in senior secured lines of credit outstanding to Soyland. These lines of
credit are to be paid before all other secured debt. CFC also had $384.6
million in loans to Soyland which are guaranteed by the U.S. Government
(REA). Subsequent to quarter end, Soyland fixed the rate on $93.7 million
through the sale of trust certificates to private investors, thereby
reducing these CFC loans from $384.6 to $290.9 million.
CFC believes that, given the underlying collateral value of its secured
loans to Soyland, it has adequately reserved for any potential loss on its
loans.
(E)Vermont Electric Generating & Transmission Cooperative, ("VEG&T"), and
Vermont Electric, ("VEC"), have both borrowed from REA and CFC. Some of
the REA financing to VEG&T was used to purchase a share of the Seabrook
Nuclear Station. While this interest in Seabrook has been sold, the
proceeds from the sale were not sufficient to repay the related REA debt.
VEC and VEG&T have been unable to raise rates, which has caused their cash
flows to be insufficient to service the REA and CFC debt. VEG&T and VEC
stopped making full payments to both parties in 1986. Since that time the
parties have not been able to obtain regulatory approval of a
restructuring. On October 5, 1994, the Vermont Public Service Board,
("PSB"), ordered VEC, VEG&T, REA and the Vermont Public Service
Department, ("PSD"), to submit a letter recommending what action the PSB
should take, by October 17, 1994.
At August 31, 1994, VEC owed principal in the amount of $15.0 million to
REA and $1.9 million to CFC, all of which is secured. At August 31, 1994,
VEG&T owed principal in the amount of $48.3 million of secured debt to REA
and $5.0 million of unsecured debt to CFC. VEC has guaranteed the VEG&T
unsecured obligation to CFC and CFC has secured a judgement for the VEG&T
obligations to CFC against VEC.
CFC has placed all loans to VEC and VEG&T on a nonaccrual basis with
respect to interest income recognition.
CFC believes that it has adequately reserved for any potential loss on its
loans to VEC and VEG&T.
12. Loans Guaranteed by REA
At August 31, 1994, CFC held $533.5 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 whos
e
payments are guaranteed by REA. Subsequent to quarter end, Soyland fixed
the rate on $93.7 million through the sale of trust certificates to private
investors. This sale reduces the balance of variable rate trust
certificates
held by CFC from $533.5 million to $439.8 million.
-16 -
<PAGE> 17
Part I. Item 2.
Management's Discussion and Analysis of Financial
Condition and Results of Operations
Changes in Financial Condition
During the quarter ended August 31, 1994, CFC's total assets increased by
$356.6 million or 5.7% to $6,580.9 million from $6,224.3 million at May 31,
1994 primarily due to increases of $329.7 million in net loans outstanding
and $19.4 million in cash and marketable securities. Changes to the loan
portfolio included long-term loan activity of $453.5 million in advances,
$180.9 million in principal repayments and $40.9 million in net loan
conversions from the variable rate to a fixed rate. Additionally, there was
$506.4 million in line of credit renewals which resulted in the rollover of
existing principal balances during the quarter.
Net loans to members represented 95% of total assets at August 31 and May
31. Long-term loans represented 84% of gross loans at both August 31 and
May 31, 1994. Fixed rate loans represented 36% of gross loans at August 31
and 34% at May 31 and the remaining loans carry a variable rate that may be
adjusted monthly or semi-monthly. At August 31, only $476.6 million or 7.4%
of gross loans were unsecured, compared to $420.6 million or 6.9% at May 31.
All other loans were secured pro-rata with other lenders (primarily REA),
by all assets and future revenues of the borrower.
At August 31, CFC had provided $2,625.4 million in guarantees, a decrease
of $30.4 million from the $2,655.8 million at May 31. These guarantees
relate primarily to tax-exempt financed pollution control equipment and to
leveraged lease transactions for plant and equipment. 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. The decrease
in guarantees during the first quarter was due to scheduled payments and a
$5.0 million leverage lease replaced by a CFC long-term loan. Subsequent
to quarter end, CFC guaranteed an additional $31.2 million in tax-exempt
solid waste disposal revenue bonds.
Also at August 31, CFC had committed to lend $5,097.1 million, a decrease
of $110.4 million from the $5,207.5 million committed at May 31. Most
unadvanced loan commitments contain a material adverse change clause. As
many of these commitments are provided for operational back-up liquidity,
CFC does not anticipate funding the majority of the commitments outstanding.
During the quarter ended August 31, CFC's total liabilities and members'
equity increased by $356.6 million or 5.7% to $6,580.9 million from $6,224.3
million at May 31. The increase was primarily due to an increase of $269.7
million in notes payable, $60.1 million in long-term debt and $27.1 million
in accounts payable partially offset by a decrease of $5.6 million in
members' subordinated certificates and equity. Subsequent to quarter end,
CFC issued $150 million in floating rate Collateral Trust Bonds, Series
1994-A, due 1996. The bonds are not redeemable prior to maturity.
The increase to notes payable and long-term debt was required to fund the
increase in loans outstanding. The increase in accounts payable was due to
the $33.7 million retirement of patronage capital. The $5.6 million
decrease to members' subordinated
-17 -
<PAGE> 18
certificates and equity was due to the $33.7 million retirement of patronage
capital, paid to members in August partially offset by net margins of $14.5
million and the issuance of $13.6 million in new subordinated certificates.
The allowance for loan and guarantee losses increased by $1.9 million to
$190.1 million at August 31, from $188.2 million at May 31. At August 31,
the loan and guarantee loss allowance represented 2.95% of gross loans,
2.10% of gross loans and guarantees, 117.15% of nonperforming and
restructured loans, and 440.1% of nonperforming 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 August 31, management believes that the allowance for loan and
guarantee losses is adequate to cover any portfolio losses which have
occurred or may occur.
As of September 30, 1994, CFC had financed prepayments to REA for 10 members
in the amount of $122.8 million. Applications for an additional $128.7
million in REA prepayments for another seven members have also been
received. This activity indicates a positive trend related to CFC's efforts
toward winning REA note buyout business.
Changes in the 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
quarter ended August 31, 1994, CFC achieved a Times Interest Earned Ratio
(TIER) of 1.18. This was a decrease from the 1.21 TIER for the quarter
ended August 31, 1993. Management has established a 1.10 TIER as its
minimum operating level.
Operating income for the quarter ended August 31, 1994, was $98.0 million,
an increase of $17.5 million from the prior year. The increase in operating
income was due to a positive rate variance of $13.2 million and a positive
volume variance of $4.3 million. At August 31, 1994 average loans
outstanding were $6,207.9 million and the average yield on loans outstanding
was 6.26%, compared to average loans outstanding of $5,332.7 million and an
average yield of 5.99% at August 31, 1993.
CFC's cost of funds for the quarter ended August 31, 1994, totaled $78.5
million, an increase of $15.1 million from the prior year. The increase was
due to a positive rate variance of $10.4 million and a positive volume
variance of $4.7 million. The average cost of funds, at August 31, 1994,
was 5.02%, an increase of 30 basis points compared to the average rate of
4.72% at August 31, 1993. Included in the cost of funds is interest expense
on CFC's Subordinated Certificates and other instruments offset by income
from the overnight investments of excess cash and the interest earnings on
debt service investments.
At August 31, 1994, general and administrative expenses of $3.7 million
represented 24 basis points of average loan volume, a decrease from August
31, 1993 expenses of $3.9 million and 29 basis points.
-18 -
<PAGE> 19
The provision for loan and guarantee losses at August 31, 1994, totaled $1.9
million or 12 basis points, compared to the prior year total of $1.9 million
or 14 basis points. CFC has maintained a provision for loan and guarantee
loss allowance in line with management's assessment of the size and quality
of the loan portfolio.
Overall CFC's net margins for the quarter ended August 31, 1994, totaled
$14.5 million, an increase of $1.3 million over the prior year. Net margins
for the quarter ended August 31, 1993, totaled $13.2 million.
Liquidity and Capital Resources
CFC is subject to liquidity risk to the extent cash repayments on its assets
or other sources of funds are insufficient to cover the cash requirements
on maturingliabilities. For the most part, CFC funds its long-term loans
with much shorter term maturity debt instruments. As a result, CFC has to
manage its liquidity risk by ensuring that other sources of funding are
available to make debt maturity payments. CFC accomplishes this in four
ways. First, CFC maintains revolving credit agreements which (subject to
certain conditions) allows CFC to borrow funds on terms of up to three
years. Second, CFC has maintained investment grade ratings, facilitating
access to the capital markets. Third, CFC maintains shelf registrations for
both its Collateral Trust Bonds and its Medium-Term Notes, either of which
(absent market disruptions and assuming CFC remains credit worthy) could
be issued at fixed or variable rates in sufficient amounts to fund the next
18 to 24 months funding requirements. Fourth, CFC obtains much of its
funding directly from its members and believes this funding is more stable
than funding obtained from outside sources.
At August 31, 1994, CFC had $3,510 million in available credit, $2,030
million ofwhich was available for up to three years and $870 million
available for up to 364 days. As of August 31, CFC was in compliance with
all covenants and conditions to borrowing. In addition, CFC had $610
million in short-term bank lines of credit available at August 31, 1994.
As of August 31, 1994, CFC had shelf registrations for Collateral Trust
Bonds and Medium-Term Notes of $300 million and $247.5 million,
respectively. Due to the issuance of $150 million in Series 1994-A Bonds
subsequent to quarter end the amount available on the shelf registration for
Collateral Trust Bonds has been reduced to $150 million.
Member invested funds,including the loan loss reserve, at August 31, 1994
and May 31, 1994, were $3,006.4 million and $2,905.6 million or 45.2% and
46.0% of CFC's total capitalization, respectively (long- and short-term debt
outstanding, members'certificates and equity and the loan loss reserve).
CFC's leverage ratio was 4.87 at August 31, 1994, a slight increase over the
4.63 reported at May 31, 1994. The increase was partly due to the
retirement of patronage capital to members in August, which resulted in a
reduction to members' equity at August 31, 1994, compared to May 31, 1994.
Additionally, the increase was due to a $269.7 million increase in notes
payable primarily from Bank Bid Notes for August 31, 1994 compared with May
31, 1994.
-19 -
<PAGE> 20
CFC is subject to interest rate risk to the extent CFC's loans are subject
to interest rate adjustment at different times than the liabilities which
fund those assets. Therefore, CFC's interest rate risk management policy
involves the close matching of asset and liability repricing terms within
a range of 5% of gross assets (total assets plus the loan and guarantee loss
allowance netted against gross loans on the balance sheet). CFC measures
the matching of funds to assets by comparing the amount of fixed rate assets
repricing or amortizing to the total fixed rate debt maturing over the next
year. At August 31, 1994, CFC had $218 million in fixed rate assets
amortizing or repricing and $89 million in fixed rate liabilities maturing
during the remainder of fiscal year 1995. The difference, $129 million,
represents the amount of CFC's assets that are not considered match-funded
as to rate. CFC's difference of $129 million at August 31, 1994 represents
1.96% of gross assets.
-20 -
<PAGE> 21
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
Exhibit 27 - Financing Data Schedules.
Exhibit 99 - Update to REA Information filed with May 31, 1994
Form 10-K.
B. Reports on Form 8-K.
June 14, 1994 - In connection with an amendment to the February
15, 1994
Collateral Trust Bond Indenture.
September 16, 1994 - In connection with the issuance of $150
million in
Collateral Trust Bonds.
-21 -
<PAGE> 22
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/ Steve L. Lilly
Chief Financial Officer
October 17, 1994
/s/ Angelo M. Salera
Controller (Principal Accounting
Officer)
October 17, 1994
-22 -
<PAGE> 23
EXHIBIT INDEX
Exhibit Page
Number Description Number
27 Financing Data Schedules 24
99 Update to REA information filed 26
with the May 31, 1994 Form 10K
-23 -
<PAGE> 24
EXHIBIT 27
-24-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND> This Schedule Contains Summary Financial
Information Extracted From The August 31,
1994, Form 10Q And Is Qualified In Its
Entirety By Reference To Such Financial
Statements
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> May-31-1994
<PERIOD-END> Aug-31-1994
<CASH> 21,607
<SECURITIES> 20,000
<RECEIVABLES> 90,528
<ALLOWANCES> 0
<INVENTORY> 6,250,734
<CURRENT-ASSETS> 6,423,308
<PP&E> 44,216
<DEPRECIATION> 5,727
<TOTAL-ASSETS> 6,580,923
<CURRENT-LIABILITIES> 2,000,483
<BONDS> 3,102,208
0
0
<COMMON> 0
<OTHER-SE> 1,478,232
<TOTAL-LIABILITY-AND-EQUITY> 6,580,923
<SALES> 97,985
<TOTAL-REVENUES> 98,496
<CGS> 78,487
<TOTAL-COSTS> 78,487
<OTHER-EXPENSES> 3,683
<LOSS-PROVISION> 1,875
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 14,451
<INCOME-TAX> 0
<INCOME-CONTINUING> 14,451
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 14,451
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
<PAGE> 1
EXHIBIT 99
-26-
<PAGE> 2
This exhibit contains an update to the REA data filed with the May
31, 1994 Form 10K. The May 31, 1994 Form 10K contained REA member
data as of December 31, 1992. Subsequent to the filing of the Form
10K, August 5, 1994, REA has released member data for December 31,
1993. This exhibit updates the REA member data, filed with the Form
10K, through December 31, 1993. Also included in this exhibit is the
new Debt Service Coverage ratio (also called "Modified DSC" or
"MDSC") for Distribution Systems during the period 1989-1993. This
MDSC calculation serves as one of the financial tests for pledging
collateral under CFC's new Collateral Trust Bond Indenture ("1994
Indenture").
-27 -
<PAGE> 3
THE RURAL ELECTRIC AND TELEPHONE SYSTEMS
General
CFC's 899 rural electric Utility Members as of May 31, 1994, were drawn from
the approximately 930 (at December 31, 1993) rural electric utility systems
(the "systems") which were eligible for REA loans. A large proportion of the
eligible systems are members of CFC and information regarding these systems is
available in the Annual Statistical Reports of REA ("REA Reports"), therefore
commentary in this section is based on information about the systems
generally, rather than CFC members alone (see Note on page 19). However, the
Composite Financial Statements on pages 20 to 24 relate only to CFC Utility
Members. At December 31, 1993 and for the year then ended, CFC's members
accounted for approximately 98% of the total utility plant, 93% of the total
equity, 97% of the net margins and 93% of the total number of systems covered
by REA Reports, and CFC believes that its members are representative of the
systems as a whole.
Although generally stable retail rates have been the historical pattern for
REA borrowers, in the 1970's and early 1980's rising costs of fuel, material,
labor, capital and wholesale power required rate increases by most of the
distribution systems. Increases in costs have also resulted in rate increases
by the power supply systems. Virtually all power contracts between power
supply systems and their member distribution systems provide for rate increases
to cover increased costs of supplying power, although in certain cases such
increases must be approved by regulatory agencies. During the last five years,
costs and rates have generally been stable.
The REA Program
Since the enactment of the Rural Electrification Act in 1936, REA has financed
the construction of electric generating plants, transmission facilities and
distribution systems in order to provide electricity to persons in rural areas
who were without central station service. Principally through the organization
of systems under the REA loan program in 46 states and U.S. territories, the
percentage of farms and residences in rural areas of the United States
receiving central station electric service increased from 11% in 1934 to almost
99% currently. Rural electric systems serve 11% of all consumers of
electricity in the United States and its territories. They account for
approximately 8% of total sales of electricity and about 7% of energy
generation and generating capacity.
In 1949, the Act was amended to allow REA to lend for the purpose of furnishing
and improving rural telephone service. At December 31, 1993, 883 of REA's 940
telephone borowers provided service to 5.6 million subscribers throughout the
United States and its territories (reporting information was not available for
the remaining 57 borrowers).
The Rural Electrification Act provides for REA to make insured loans and to
provide other forms of financial assistance to borrowers. REA is authorized
to make direct loans, at below market rates, to systems which are eligible to
borrow from it. REA is also authorized to guarantee loans which have been used
mainly to provide financing for construction of Bulk Power Supply Projects.
Guaranteed loans bear interest at a rate agreed upon by the borrower and the
lender (which generally has been the FFB). For telephone borrowers, REA also
provides financing through the Rural Telephone Bank (RTB). The RTB is a
government corporation providing financing at rates reflecting its cost of
capital. REA exercises a high degree of financial and technical supervision
over borrowers' operations. Its loans and guarantees are generally secured by
a mortgage on substantially all of the system's property and revenues.
Legislation has been proposed which would provide funding of $675 million for
the REA insured loan program for electric borrowers for FY 1995 and $498
million for the telephone borrowers through REA and the RTB. In addition, $300
million was proposed for the REA guaranteed electric loan program.
Legislation has been enacted which allows REA electric borrowers to prepay
their loans to REA at a discount based on the government's cost of funds at the
time of prepayment. If a borrower chooses to prepay its notes, it becomes
ineligible for future REA lending for a period of ten years, except in certain
specified instances. Regulations regarding the note buy-out, relating to
computation of discount and certain issues concerning potential taxes on gains,
were adopted on March 22, 1994. As of May 31, 1994, no borrowers have prepaid
their REA loans under these rules.
<PAGE> 4
Distribution Systems
Distribution systems are local utilities distributing electric power, generally
purchased from wholesale sources, to consumers in their service areas.
Virtually all are locally-managed cooperative, non-profit associations, and
most have been in operation for at least 40 years. At December 31, 1993, the
approximate number of consumers served by REA electric borrowers was 12.4
million, representing an estimated 32.5 million ultimate users. Aggregate
operating revenues of the distribution systems from sales of electric energy
for the year ended December 31, 1993, totaled $15.1 billion, of which 66% was
derived from the sales of electricity to residential consumers (farm and
non-farm), 30% from such sales to commercial and industrial consumers and
the remainder from sales to various other consumers.
The composite TIER of CFC member distribution systems increased to 2.54 in
1993 from 2.19 in 1992. The composite DSC ratio increased to 2.44 in 1993
from 2.07 in 1992. Composite equity as a percent of total assets for member
distribution systems increased from 39.44% at December 31, 1992 to 40.83% at
December 31, 1993.
The cost of purchased wholesale power in 1993 amounted to 65.95% of the total
revenues of the distribution systems. Information from REA concerning the
amount of energy generated and purchased by REA borrowers including
distribution systems during the 12 months ended December 31, 1992 (1993 data
is not available) indicates that 18.4% was purchased from power companies
including investor-owned utilities and industrial and manufacturing
corporations, 55.5% from rural electric power supply systems and other
distribution systems having generating facilities, 18.8% from Federal agencies
and 7.3% from publicly-owned power suppliers, such as municipal systems.
Wholesale power supply contracts ordinarily guarantee neither an uninterrupted
supply nor a constant cost of power. Contracts with REA-financed power supply
systems (which generally require the distribution system to purchase all its
power requirements from the power supply system) provide for rate increases to
pass along increases in sellers' costs (subject in certain cases to regulatory
approval). The wholesale power contracts permit the power supply system,
subject to approval by REA and, in certain circumstances, regulatory agencies,
to establish rates to its members so as to produce revenues sufficient, with
revenues from all other sources, to meet the costs of operation and maintenance
(including, without limitation, replacements, insurance, taxes and
administrative and general overhead expenses) of all generating, transmission
and related facilities, to pay the cost of any power and energy purchased for
resale, to pay the costs of generation and transmission, to make all payments
on account of all indebtedness and leases of the power supply system and to
provide for the establishment and maintenance of reasonable reserves. The
rates under the wholesale power contracts are required to be reviewed by the
Board of Directors of the power supply system at least annually.
Power contracts with investor-owned utilities and power supply systems which
do not borrow from REA generally have rates subject to regulation by the
Federal Energy Regulatory Commission. Contracts with Federal agencies
generally permit rate changes by the selling agency (subject, in some cases,
to Federal regulatory approval). In the case of many distribution systems,
only one power supplier is within a feasible distance to provide wholesale
electricity.
Power Supply Systems
Power supply systems are utilities which purchase or generate electric power
and provide it wholesale to distribution systems for delivery to the ultimate
retail consumer. Of the 62 operating power supply systems financed in whole
or in part by REA or CFC at December 31, 1993, 61 were cooperatives owned
directly or indirectly by groups of distribution systems and one was
government owned. Of this number, 39 had generating capacity of at least
100,000 kilowatts, and eight had no generating capacity. Five of the eight
systems with no generating capacity operated transmission lines to supply
certain distribution systems, one has applied for REA financing for its first
transmission facility and two are currently building their first transmission
facilities. Certain other power supply systems had been formed but did not
yet own generating or transmission facilities. At December 31, 1993, the 55
power supply systems reporting to REA owned 145 generating plants with a total
generating capacity of approximately 29,597,000 kilowatts, or approximately
4.3% of the nation's estimated electric generating capacity and served 716
REA distribution system borrowers (representing an average for the year of
approximately 8.5 million consumers).
<PAGE> 5
Certain of the Power Supply systems which own generating plants lease these
facilities to others and purchase their power requirements from the
lessee-operators.
Of the Power Supply systems' total generating capacity in place as of December
31, 1993, steam plants accounted for 94.2% (including nuclear capacity
representing approximately 10.2% of such total generating capacity), internal
combustion plants accounted for 5.5% and hydroelectric plants accounted for
0.3%. REA loans and loan guarantees as of December 31, 1992, have provided
funds for the installation of over 34,031,000 kilowatts, of which nuclear is
approximately 3,806,000 kilowatts, or 11.2% of the total, of which 1,279,000
kilowatts have officially been cancelled, or 3.8% of the total.
The high level of growth in demand for electricity experienced in the 1970's
was not expected to decline in the 1980's and the Power Supply systems
continued their construction programs in anticipation of continued growth
in demand. During the 1980's, however, slower growth in power requirements
of the systems reduced the need for additional generating capacity in most
areas of the country. Thus, many areas are now experiencing a surplus of
generating capacity and, as a result, some Power Supply systems have
significant amounts of fixed costs for power plant investment not fully
supported by increased revenues (see Note 10 to Combined Financial Statements
for further information concerning certain CFC members experiencing this
problem).
While the level of funds needed for new generating units is expected to be
low over the next few years, the need for transmission and capital additions
will continue to generate substantial long-term capital requirements. The
Power Supply systems are expected to continue to seek to satisfy these
requirements primarily through the REA loan guarantee program.
Regulation and Competition
The degree of regulation of rural electric systems by state authorities varies
from state to state. The retail rates of rural electric systems are regulated
in 17 states (in which there are approximately 289 systems). Distribution
systems in these states account for 34% of the total operating revenues and
patronage capital of all distribution systems nationwide. State agencies,
principally public utility commissions, of 20 states regulate those states'
approximately 300 systems as to the issuance of long-term debt securities.
In six states (in which there are approximately 100 systems) state agencies
regulate, to varying degrees, the issuance of short-term debt securities.
Since 1967, the Federal Power Commission and its successor, the Federal
Energy Regulatory Commission ("FERC"), which regulates interstate sales of
energy at wholesale, have taken the position that it lacks jurisdiction to
regulate cooperative rural electric systems which are current borrowers from
REA. However, rural electric cooperatives that pay off their REA debt or never
incur REA debt may be regulated by FERC with respect to financing and/or rates.
To date, four Power Supply systems and one distribution system are regulated
by FERC.
Varying degrees of territorial protection against competing utility systems
are provided to distribution systems in 41 states (in which over 92% of the
distribution systems are located). Changes in administrative or legislative
policy in several states, or Federal legislation, may result in more or in
less territorial protection for the distribution systems.
In addition to competition from other utility systems, some distribution
systems have expressed increasing concern about the loss of desirable
suburban service areas as a result of annexation by expanding municipal or
franchised investor-owned utility systems, regardless of the degree of
territorial protection otherwise provided by applicable law. The systems
are also subject to competition from alternate sources of energy such as
bottled gas, natural gas, fuel oil, diesel generation, wood stoves and
self-generation.
The systems, in common with the electric power industry generally, may incur
substantial capital expenditures and increases in operating costs in order to
meet the requirements of both present and future Federal, state and local
standards relating to safety and environmental quality control. These include
possible requirements for burying distribution lines and meeting air and water
quality standards.
On November 15, 1990, amendments to the Clean Air Act of 1970 (the
"Amendments"), designed to cause utilities and others to reduce emissions,
became law. The Amendments contain a range of compliance options
<PAGE> 6
s and a phase-in period which will help mitigate the immediate costs of
implementation. Many of CFC's member systems already comply with the
provisions of the Amendments. CFC is currently monitoring the overall
impact of the Amendments on individual member systems, which must implement
compliance plans and operating or equipment modifications for Phase I of the
Act (1995), and for those affected in Phase II of the Act (2000). Compliance
plans for member systems with units affected in Phase I primarily involve
fuel switching to low-sulfur coal. The trading of emission allowances may
also be an economical alternative in Phase II. Some member systems originally
believed to be affected by the Amendments have developed strategies designed
to minimize the Amendment's impact. At this time, it is not anticipated that
the Amendments will have a material adverse impact on the quality of CFC's
loan portfolio.
Financial Information
The systems differ from investor-owned utilities in that the vast majority are
cooperative, non-profit organizations operating under policies which provide
that rates should be established so as to minimize rates over the long-term.
Revenues in excess of operating costs and expenses are referred to as "net
margins and patronage capital" and are treated as equity capital furnished by
the systems' consumers. This "capital" is transferred to a balance sheet
account designated as "patronage capital", and is usually allocated to
consumers in proportion to their patronage. Such capital is not refunded to
them for a period of years during which time it is available to the system
to be used for proper corporate purposes. Subject to their applicable
contractual obligations, the systems may refund such capital to their members
when doing so will not impair the systems' financial condition. In the
terminology of the Uniform System of Accounts prescribed by REA for its
borrowers, "operating revenues and patronage capital" refers to all utility
operating income received during a given period.
Similar to the practice followed by investor-owned utilities pursuant to FERC
procedures and as prescribed by REA, the systems capitalize as a cost of
construction the interest charges on borrowed funds ("interest charged to
construction") and the estimated unearned interest attributable to
internally-generated funds ("allowance for funds used during construction")
used in the construction of generation, and to a lesser extent transmission
and distribution facilities. This accounting policy, which increases net
margins by the amounts of these actual and imputed interest charges, is based
on the premise that the cost of financing construction is an expenditure
serving to increase the productive capacity and value of the utility's assets
and thus should be included in the cost of the assets constructed and
recovered over the life of the assets. In the case of power supply systems,
REA has included in its direct loans and guarantees of loans amounts
sufficient to meet the estimated interest charges during construction. If the
foregoing accounting policy were not followed, utilities would presumably
request regulatory permission, if applicable, to increase their rates to cover
such costs. The amounts of interest charged to construction and allowance for
funds used during construction capitalized by distribution systems are
relatively insignificant. Because power supply systems generally expend
substantial amounts on long-term construction projects, the application of
this accounting policy may result in substantially lower interest expense
and in substantially higher net margins for such systems during construction
than would be the case if such a policy were not followed.
On the following pages are tables providing composite statements of revenues,
expenses and patronage capital of the distribution systems which were members
of CFC and the power supply systems which were members of CFC during the five
years ended December 31, 1993, and their respective composite balance sheets
at the end of each such year.
NOTE: Statistical information in the REA Reports has not been examined by
CFC's independent public accountants, and the number and geographical
dispersion of the systems have made impractical an independent investigation
by CFC of the statistical information available from REA. The REA Reports
are based upon financial statements submitted to REA, subject to year-end
audit adjustments, by reporting REA borrowers and do not, with minor
exceptions, take into account current data for certain systems, primarily those
which are not active REA borrowers. As of December 31, 1993, 163 REA borrowers
had repaid their REA loans in full and were accordingly not subject to REA
reporting requirements.
<PAGE> 7
<TABLE>
<CAPTION>
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
COMPOSITE STATEMENTS OF REVENUES, EXPENSES AND PATRONAGE CAPITAL
AS REPORTED BY CFC MEMBER DISTRIBUTION SYSTEMS
The following are unaudited figures which are based
upon financial statements submitted to REA or to
CFC by CFC Member Distribution Systems
Years Ended December 31,
1993 1992 1991 1990 1989
(Dollar Amounts In Thousands)
<S> <C> <C> <C> <C> <C>
Operating revenues and patronage capital $15,072,400 $13,921,515 $13,446,544 $12,819,204 $12,303,951
Operating deductions:
Cost of power (1) 9,882,448 9,211,421 8,979,920 8,558,404 8,363,149
Distribution expense (operations) 366,148 346,183 327,787 307,649 289,525
Distribution expense (maintenance) 643,390 589,722 558,291 528,746 496,245
Administrative and general expenses (2) 1,398,749 1,287,224 1,215,158 1,137,154 1,060,641
Depreciation and amortization expense 879,957 828,966 775,049 724,951 676,706
Taxes 396,024 365,473 337,898 313,403 299,542
Total 13,566,716 12,628,989 12,194,103 11,570,307 11,185,808
Utility operating margins 1,505,684 1,292,526 1,252,441 1,248,897 1,118,143
Non-operating margins 110,612 157,912 175,993 201,798 202,183
Power supply capital credits (3) 274,250 219,638 201,708 163,580 135,394
Total 1,890,546 1,670,076 1,630,142 1,614,275 1,455,720
Interest on long-term debt (4) 730,078 749,594 763,070 741,465 691,738
Other deductions 36,644 27,841 18,953 22,607 20,396
Total 766,722 777,435 782,023 764,072 712,134
Net margins and patronage capital $1,123,824 $ 892,641 $ 848,119 $ 850,203 $ 743,586
TIER (5) 2.54 2.19 2.11 2.15 2.07
DSC (6) 2.44 2.07 2.13 2.16 2.09
MDSC (7) 2.21 1.99 2.06 2.05 2.03
Number of systems included 825 821 819 820 822
(1) Includes cost of purchased power, power production and transmission
expense, separately listed in the applicable REA Report.
(2) Includes sales expenses, consumer accounts and customer service and
informational expense as well as other administrative and general expenses,
separately listed in the applicable REA Report.
(3) Represents net margins of power supply systems and other associated
organizations allocated to their member distribution systems and added in
determining net margins and patronage capital of distribution systems
under REA accounting practices. Cash distributions of this credit have
rarely been made by the power supply systems and such other organizations
to their members.
(4) Interest on long-term debt is net of interest charged to construction,
which is stated separately as a credit in REA Reports. For a description
of the reasons for, and the effect on net margins and patronage capital
of, the accounting policies governing interest charged to construction and
allowance for funds used during construction, see "Financial Information".
CFC believes that amounts incurred by distribution systems for interest
charged to construction and allowance for funds used during construction
are immaterial relative to their total interest on long-term debt and net
margins and patronage capital.
(5) Determined by adding interest on long-term debt (in each year including all
interest charged to construction) and net margins and patronage capital
and dividing the total by interest on long-term debt (in each year
including all interest charged to construction).
(6) The ratio of (x) net margins and patronage capital plus interest on
long-term debt (including All interest charged to construction) plus
depreciation and amortization to (y) long-term debt service obligations.
(7) The new DSC (also called the "Modified DSC" or "MDSC") calculation is the
ratio of (x) operating margins and patronage capital plus interest on
long-term debt (including all interest charged to construction) plus
depreciation and amortization expense plus Non-operating Margins-Interest
plus cash received in respect of generation and transmission and other
capital credits to (y) long-term debt service obligations.
</TABLE>
20
<PAGE> 8
<TABLE>
<CAPTION>
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
COMPOSITE BALANCE SHEETS
AS REPORTED BY CFC MEMBER DISTRIBUTION SYSTEMS
The following are unaudited figures which are based
upon financial statements submitted to REA or to
CFC by CFC Member Distribution Systems
At December 31,
1993 1992 1991 1990 1989
(Dollar Amounts In Thousands)
<S> <C> <C> <C> <C> <C>
Assets and other debits:
Utility plant:
Utility plant in service $29,172,898 $27,502,596 $25,846,550 $24,370,100 $22,754,138
Construction work in progress 697,329 619,764 615,425 623,356 650,533
Total utility plant 29,870,227 28,122,360 26,461,975 24,993,456 23,404,671
Less: accumulated provision for depreciation
and amortization 7,992,325 7,401,028 6,812,221 6,330,979 5,879,089
Net utility plant 21,877,902 20,721,332 19,649,754 18,662,477 17,525,582
Investments in associated organizations (1) 2,847,260 2,585,621 2,405,290 2,255,370 2,123,391
Current and accrued assets 3,733,893 3,611,874 3,624,025 3,585,399 3,362,784
Other property and investments 366,452 343,734 323,445 311,937 248,245
Deferred debits 463,194 439,529 342,855 287,294 263,002
Total assets and other debits $29,288,701 $27,702,090 $26,345,369 $25,102,477 $23,523,004
Liabilities and other credits:
Net worth:
Memberships $ 100,689 $ 98,450 $ 93,207 $ 91,827 $ 88,972
Patronage capital and other equities (2) 11,859,273 10,826,559 9,966,135 9,275,621 8,460,725
Total net worth 11,959,962 10,925,009 10,059,342 9,367,448 8,549,697
Long-term debt (3) 14,569,363 14,303,024 13,958,473 13,461,363 12,681,327
Current and accrued liabilities 2,066,601 1,898,868 1,755,336 1,734,385 1,741,832
Deferred credits 598,997 555,618 554,149 521,339 534,176
Miscellaneous operating reserves 93,778 19,571 18,069 17,942 15,972
Total liabilities and other credits $29,288,701 $27,702,090 $26,345,369 $25,102,477 $23,523,004
Number of systems included 825 821 819 820 822
(1) Includes investments in service organizations, power supply capital
credits and investments in CFC.
(2) Includes non-refundable donations or contributions in cash, services
or property from states, municipalities, other government agencies,
individuals and others for construction purposes separately listed in the
applicable REA Report.
(3) Principally debt to REA and includes $3,607,158,918, $3,536,794,013,
$3,435,994,499, $3,283,689,097, and $3,018,608,279 for the years 1993,
1992, 1991, 1990 and 1989, respectively, due to CFC.
</TABLE>
21
<PAGE> 9
<TABLE>
<CAPTION>
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
COMPOSITE STATEMENTS OF REVENUES, EXPENSES AND PATRONAGE CAPITAL
AS REPORTED BY CFC MEMBER POWER SUPPLY SYSTEMS
The following are unaudited figures which are based
upon financial statements submitted to REA or to
CFC by CFC Member Power Supply Systems
Years Ended December 31,
1993 1992 1991 1990 1989
(Dollar Amounts in Thousands)
<S> <C> <C> <C> <C> <C>
Operating revenues and patronage capital $9,976,560 $ 9,111,434 $ 8,615,165 $ 8,553,618 $ 8,589,575
Operating deductions:
Cost of power (1) 6,606,419 5,855,131 5,541,332 5,461,628 5,436,747
Transmission expense (operations) 14,391 12,959 11,445 9,451 8,109
Transmission expense (maintenance) 11,081 11,300 11,315 10,611 8,425
Administrative and general expenses (2) 333,278 390,521 363,646 338,256 312,364
Depreciation and amortization expenses 902,810 872,657 819,586 821,943 796,955
Taxes 223,122 233,420 239,588 182,279 233,891
Total 8,091,101 7,375,988 6,986,912 6,824,168 6,796,491
Utility operating margins 1,785,458 1,735,446 1,628,253 1,729,450 1,793,084
Non-operating margins 328,958 280,810 329,419 328,349 305,067
Power supply capital credits (3) 47,838 30,771 28,405 12,452 19,259
Total 2,162,254 2,047,027 1,986,077 2,070,251 2,117,410
Interest on long-term debt (4) 2,014,794 2,075,939 1,999,107 1,968,531 1,839,641
Other deductions 184,902 137,344 42,862 203,548 330,870
Total 2,199,696 2,213,283 2,041,969 2,172,079 2,170,511
Net margins and patronage $ (37,442) $(166,256) $ (55,892) $(101,828) $ (53,101)
TIER (5) .98 .92 .97 .95 .97
DSC (6) 1.03 1.05 1.06 1.05 1.08
Number of systems included (7) 50 50 49 50 51
(1) Includes cost of purchased power, power production and transmission
expense, separately listed in the applicable REA Report.
(2) includes sales expenses and consumer accounts expense and consumer service
and informational expense as well as other administrative and general
expenses, separately listed in the applicable REA Report.
(3) Certain power supply systems purchase wholesale power from other power
supply systems of which they are members. Power supply capital credits
represent net margins of power supply systems allocated to member power
supply systems on the books of the selling power supply systems. This
item has been added in determining net margins and patronage capital
of the purchasing power supply systems under REA accounting practices.
Cash distributions of this credit have rarely been made by the selling
power supply systems to their members. This item also includes net margins
of associated organizations allocated to CFC power supply members and
added in determining net margins and patronage capital of the CFC member
systems under REA accounting practices.
(4) Interest on long-term debt is net of interest charged to construction.
Allowance for funds used during construction has been included in
non-operating margins. For a description of the reasons for, and the
effect on net margins and patronage capital of, the accounting policies
governing interest charged to construction and allowance for funds used
during construction, see "Financial Information". According to
unpublished information furnished by REA, interest charged to construction
and allowance for funds used during construction for CFC power supply
members in the years 1989-1993 were as follows:
</TABLE>
22
<PAGE> 10
<TABLE>
<CAPTION>
Allowance for
Interest Charged Funds used
to Construction During Construction Total
<S> <C> <C> <C> <C>
(Dollar Amounts In Thousands)
1993 $ 49,237 $8,621 $ 57,858
1992 $ 54,093 $4,396 $ 58,489
1991 $ 49,495 $5,241 $ 54,736
1990 $ 55,670 $6,615 $ 62,285
1989 $100,380 $6,761 $107,141
(5) Determined by adding interest on long-term debt (in each year
including all interest charged to construction) and net margins and
patronage capital and dividing the total by interest on long-term debt
(in each year including all interest charged to construction). The TIER
calculation includes the operating results of six systems which currently
fail to make debt service payments or are operating under a Debt
Restructure Agreement, without which the composite TIER would have been
1.20, 1.15, 1.15, 1.08 and 1.10 for the years ended December 31, 1993,
1992, 1991, 1990 and 1989, respectively.
(6) The ratio of (x) net margins and patronage capital plus interest on
long-term debt (including all interest charged to construction) plus
depreciation and amortization to (y) long-term debt service obligations.
The DSC calculation includes the operating results of six systems which
currently fail to make debt service payments or are operating under a
Debt Restructure Agreement. Without these systems, the composite DSC
would have been 1.21, 1.22, 1.26, 1.21 and 1.21 for the years ended
December 31, 1993, 1992, 1991, 1990 and 1989, respectively.
(7) Thirteen CFC power supply system members are not required to report to REA
since they are not currently borrowers from REA. These systems are
either in developmental stages or act as coordinating agents for their
members. Their inclusion would not have a material effect on this data.
In addition, REA has determined not to include data for Wabash Valley
Power Association ("Wabash") and Colorado-Ute in their composite statements
due to Wabash's ongoing bankruptcy and the liquidation of Colorado-Ute
(see Note 10 to Combined Financial Statements).
</TABLE>
23
<PAGE> 11
<TABLE>
<CAPTION>
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
COMPOSITE BALANCE SHEETS
AS REPORTED BY CFC MEMBER POWER SUPPLY SYSTEMS
The following are unaudited figures which are based
upon financial statements submitted to REA or to
CFC by CFC Member Power Supply Systems
At December 31,
1993 1992 1991 1990 1989
(Dollar Amounts in Thousands)
<S> <C> <C> <C> <C> <C>
Assets and other debits:
Utility plant:
Utility plant in service $32,240,926 $31,375,391 $29,433,524 $29,421,761 $29,777,550
Construction work in progress 1,469,882 1,324,432 911,262 695,229 891,907
Total utility plant 33,710,808 32,699,823 30,344,786 30,116,990 30,669,457
Less: accumulated provision for
depreciation and amortization 9,936,528 8,983,913 7,786,074 7,032,102 6,277,677
Net utility plant 23,774,280 23,715,910 22,558,712 23,084,888 24,391,780
Investments in associated organizations(1) 992,921 865,162 740,554 654,419 661,338
Current and accrued assets 4,284,613 4,076,841 4,239,802 4,094,006 4,399,010
Other property and investments 1,899,809 1,717,451 1,503,526 1,447,443 1,121,803
Deferred Debits 4,078,879 1,879,607 1,445,868 2,236,808 2,303,752
Total assets and other debits 35,030,502 $32,254,971 $30,488,462 $31,517,564 $32,877,683
Liabilities and other credits:
Net worth:
Memberships $ 252 $ 246 $ 244 $ 250 $ 248
Patronage capital and other equities 432,095 315,793 593,505 544,872 690,481
Total net worth 432,347 316,039 593,749 545,122 690,729
Long-term debt (2) 28,528,640 28,838,255 27,060,357 27,989,365 25,671,597
Current and accrued liabilities 1,185,182 1,531,722 1,391,762 1,492,713 5,117,204
Deferred credits 1,849,906 1,071,393 1,344,641 1,113,545 1,035,989
Miscellaneous operating reserves 3,034,427 497,562 97,953 376,819 362,164
Total liabilities and other credits 35,030,502 $32,254,971 $30,488,462 $31,517,564 $32,877,683
Number of systems included (3) 50 50 49 50 51
(1) Includes investments in service organizations, power supply capital credits
and investments in CFC.
(2) Principally debt to REA or debt guaranteed by REA and loaned by FFB.
(3) Twelve CFC power supply system members are not required to report to REA
since they are not currently borrowers from REA. These systems are either
in developmental stages or act as coordinating agents for their members.
Their inclusion would not have a material effect on these data.
</TABLE>
Item 2. Properties.
CFC owns and operates a headquarters facility in Fairfax County in the
Commonwealth of Virginia. This facility consists of a six-story office
building with separate parking garage situated on four acres of land.
The company also owns an additional eight acres of unimproved land
adjacent to the building. On April 11, 1994, CFC purchased an additional
23 1/2 acres of unimproved land adjacent to the building. There are no
plans at this time for future use of either parcel of land.
24
