<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 February 28, 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 1 of 21
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
<PAGE> 2
<TABLE>
<CAPTION>
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
COMBINED BALANCE SHEETS
(Dollar Amounts In Thousands)
A S S E T S
(Unaudited)
February 28, 1994 May 31, 1993
<S> <C> <C>
Cash $ 17,002 $ 55,450
Marketable Securities 25,000 0
Debt Service Investments 44,815 45,611
Loans To Members, net 5,685,923 5,112,471
Receivables 80,085 87,763
Fixed Assets, net 30,766 31,777
Debt Service Reserve Funds 107,095 116,470
Other Assets 12,730 14,602
Total Assets $ 6,003,416 $ 5,464,144
The accompanying notes are an integral part of these combined financial statements.
</TABLE>
- 2 -
<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)
February 28, 1994 May 31, 1993
<S> <C> <C>
Notes Payable, due within one year (Note 6) $ 1,307,643 $ 503,624
Accounts Payable 17,212 18,019
Accrued Interest Payable 45,217 47,822
Long-Term Debt 3,119,679 3,382,284
Other Liabilities 37,479 38,549
Commitments, Guarantees and Contingencies
(Notes 7, 9, 10 and 11)
Members' Subordinated Certificates (Note 5):
Membership subscription certificates 640,520 640,520
Loan and guarantee certificates 577,958 575,027
Total Members' Subordinated Certificates 1,218,478 1,215,547
Members' Equity (Note 8) 257,708 258,299
Total Members' Subordinated Certificates
and Members' Equity 1,476,186 1,473,846
Total Liabilities and Members' Equity $ 6,003,416 $ 5,464,144
The accompanying notes are an integral part of these combined financial statements.
</TABLE>
- 3 -
<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 Nine Months Ended February 28, 1994 and 1993
Quarters Ended Nine Months Ended
February 28, February 28,
1994 1993 1994 1993
<S> <C> <C> <C> <C>
Operating Income - Interest on loans to members $ 83,317 $ 82,933 $ 245,923 $ 255,031
Less-Cost of funds allocated 65,338 65,303 192,917 200,586
Gross operating margin 17,979 17,630 53,006 54,445
Expenses:
General, administrative and loan processing 4,141 4,178 12,211 12,286
Provision for loan and guarantee losses (Note 4) 11,875 3,750 15,625 11,250
Total expenses 16,016 7,928 27,836 23,536
Operating margin 1,963 9,702 25,170 30,909
Nonoperating Income 1,056 1,324 3,468 2,835
Net Margins Before Extraordinary Loss 3,019 11,026 28,638 33,744
Extraordinary Loss (Note 13) 0 0 0 (3,161)
Net Margins $ 3,019 $ 11,026 $ 28,638 $ 30,583
The accompanying notes are an integral part of these combined financial statements.
</TABLE>
- 4 -
<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 February 28, 1994 and 1993
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 February 28, 1994
Balance at November 30, 1993 $ 255,336 $ 1,300 $ 345 $ 27,907 $ 193 $ 225,591
Retirement of patronage capital (670) (670)
Net Margins 3,019 3,019
Other 23 19 1 3
Balance at February 28, 1994 $ 257,708 $ 1,319 $ 345 $ 30,927 $ 193 $ 224,924
Quarter Ended February 28, 1993
Balance at November 30, 1992 $ 241,156 $ 1,219 $ 320 $ 21,846 $ 476 $ 217,295
Retirement of patronage capital (1,218) (1,218)
Net Margins 11,026 11,026
Other 12 12
Balance at February 28, 1993 $250,976 $ 1,231 $ 320 $ 32,872 $ 476 $ 216,077
The accompanying notes are an integral part of these combined financial statements.
</TABLE>
- 5 -
<PAGE> 6
<TABLE>
<CAPTION>
(UNAUDITED)
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
COMBINED STATEMENTS OF CHANGES IN MEMBERS' EQUITY
(Dollar Amounts In Thousands)
For the Nine Months Ended February 28, 1994 and 1993
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>
Nine Months Ended February 28, 1994
Balance at May 31, 1993 $ 258,299 $ 1,247 $ 312 $ 2,289 $ 488 $ 253,963
Retirement of patronage capital (28,654) (295) (28,359)
Net Margins 28,638 28,638
Other (575) 72 33 (680)
Balance at February 28, 1994 $ 257,708 $ 1,319 $ 345 $ 30,927 $ 193 $ 224,924
Nine Months Ended February 28, 1993
Balance at May 31, 1992 $ 246,696 $ 1,181 $ 289 $ 2,289 $ 483 $ 242,454
Retirement of patronage capital (26,637) (7) (26,630)
Net Margins 30,583 30,583
Other 334 50 31 253
Balance at February 28, 1993 $250,976 $ 1,231 $ 320 $ 32,872 $ 476 $ 216,077
The accompanying notes are an integral part of these combined financial statements.
</TABLE>
- 6 -
<PAGE> 7
<TABLE>
<CAPTION>
(UNAUDITED)
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
COMBINED STATEMENTS OF CASH FLOWS
(Dollar Amounts In Thousands)
For the Nine Months Ended February 28, 1994 and 1993
1994 1993
<S> <C> <C>
Cash Flows From Operating Activities:
Accrual basis net margins $ 28,638 $ 30,583
Add (deduct):
Provision for loan and guarantee losses 15,625 11,250
Depreciation 2,814 2,564
Amortization of deferred income (14,189) (8,804)
Add (deduct) changes in accrual accounts:
Receivables 10,292 10,358
Accounts payable (540) 1,741
Accrued interest payable (2,912) (4,407)
Deferred Income 13,755 20,844
Other (4,692) 4,506
Net cash flows provided by operating activities 48,791 68,635
Cash Flows From Investing Activities:
Advances made on loans (1,624,083) (1,115,863)
Principal collected on loans 1,035,005 1,074,876
Investment in fixed assets (159) (4,703)
Net cash flows used in investing activities (589,237) (45,690)
Cash Flows From Financing Activities:
Notes payable, net 804,019 262,239
Arbitrage Investments, net (25,000) 0
Debt service investments, net 797 51,609
Proceeds from issuance of Long-Term Debt 104,617 78,916
Payments for retirement of long-term debt (368,306) (403,474)
Proceeds from issuance of Members' Subordinated
Certificates 24,473 26,436
Payments for retirement of Members' Subordinated
Certificates (9,481) (15,632)
Payments for retirement of patronage capital (29,121) (26,632)
Net cash flows provided by financing activities 501,998 (26,538)
Net Cash Flows (38,448) (3,593)
Beginning Cash 55,450 46,312
Ending Cash $ 17,002 $ 42,719
Supplemental Disclosure of Cash Flow Information:
Cash paid during nine months for interest expense $ 196,622 $ 207,287
The accompanying notes are an integral part of these combined financial statements.
</TABLE>
- 7 -
<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 February 28, 1994, included 899 rural electric
utility system members ("Utility Members"), virtually all of which are
consumer-owned cooperatives, 71 service members and 65 associate members.
The Utility Members included 834 distribution systems and 65 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 provid-
ing, 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 February 28, 1994, RTFC had 335
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 refinancing of
certain 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 three members other than
CFC at February 28, 1994. 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 February 28, 1994 and May 31, 1993, and the combined
results of operations, cash flows and changes in members' equity for the
quarters ended February 28, 1994 and 1993.
- 8 -
<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 from the May 31, 1993 Combined Balance
Sheets have been reclassified to conform with the February 28, 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 February 28, 1994, CFC had committed to lend RTFC up to
$1,150 million to fund loans to its members and their affiliates. RTFC had
outstanding loans and unadvanced loan commitments totaling $1,019.1 million
and $598.9 million as of February 28, 1994 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>
February 28, May 31,
1994 1993
(Dollar Amounts In Thousands)
<S> <C> <C>
Outstanding loans to members and
thier affiliates $ 515,594 $ 460,864
Total assets 600,544 529,562
Notes payable to CFC 515,594 460,864
Total liabilities 525,405 467,062
Members' Equity and
Subordinated Certificates 75,139 62,500
</TABLE>
<TABLE>
<CAPTION>
For the Nine Months Ended
February 28, February 28,
1994 1993
(Dollar Amounts In Thousands)
<S> <C> <C>
Operating income $ 21,156 $ 21,237
Net margins 1,360 1,134
</TABLE>
As of February 28, 1994 and May 31, 1993, CFC had loans outstanding to GFC in
the amount of $280.8 million and $286.5 million, respectively to fund the
purchase of REA guaranteed loans from CFC. Summary financial information
relating to GFC included in the combined financial statements as of February
28, 1994 and May 31, 1993 and for the nine months ended February 28, 1994 is
presented below:
- 9 -
<PAGE> 10
<TABLE>
<CAPTION>
February 28, May 31,
1994 1993
(Dollar Amounts In Thousands)
<S> <C> <C>
Outstanding loans to members $ 280,760 $ 286,460
Total assets 291,947 300,636
Notes payable to CFC 287,980 294,548
Total liabilities 291,139 299,953
Members' Equity 808 683
</TABLE>
<TABLE>
<CAPTION>
For the Nine Months ended
February 28, February 28,
1994 1993
(Dollar Amounts In Thousands)
<S> <C> <C>
Operating income $ 8,312 $ 8,556
Net margins 794 702
</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 February 28, 1994 and May 31, 1993, mortgage notes representing
approximately $723.8 million and $1,301.7 million, respectively, of out-
standing 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 outstand-
ing. At February 28, 1994 and May 31, 1993, CFC had Collateral Trust Bonds
outstanding totaling $643.3 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 consider-
ed 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
- 10 -
<PAGE> 11
losses may differ from the allowance amount. As of February 28, 1994 and May
31, 1993, such allowance was $188.2 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. 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 February 28, 1994 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 suport 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. In connection with the 365 facility, it
is contemplated that CFC will extend the maturity date to May 31, 1995,
prior to its maturity.
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 incur-
red 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 excep-
tions, 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
- 11 -
<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
agreements until the termination date. As of February 28, 1994 and May 31,
1993, CFC was in compliance with all covenants and conditions.
As of February 28, 1994 and May 31, 1993, there were no borrowings outstand-
ing under the revolving credit agreements. At February 28, 1994 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 February 28, 1994 and May 31, 1994, CFC had unadvanced loan
commitments, summarized by type of loan, as follows:
<TABLE>
<CAPTION>
(Dollar Amounts In Thousands)
February 28, 1994 May 31, 1993
<S> <C> <C>
Long-term $ 1,329,537 $ 1,075,386
Intermediate-term 297,824 380,819
Short-term 2,769,414 2,605,047
Telecommunications 503,525 138,074
Associate Member 54,436 57,649
Nonperforming 1,300 23,500
Restructured 90,800 26,500
Total unadvanced loan
commitments $ 5,046,836 $ 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.
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.
- 12 -
<PAGE> 13
9.Guarantees
As of February 28, 1994 and May 31, 1993, CFC had guaranteed the following
contractual obligations of its members:
<TABLE>
<CAPTION>
(Dollar Amounts In Thousands)
February 28, 1994 May 31, 1993
<S> <C> <C>
Long-term tax-exempt bonds (A) $ 1,497,775 $ 1,576,230
Debt portions of leveraged lease
transactions (B) 675,132 700,841
Indemnifications of tax benefit
transfers (C) 417,924 436,860
other guarantees (E) 101,562 99,800
Total guarantees $ 2,692,393 $ 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, $1,217.4 million and $1,120.8
million as of February 28, 1994 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 February 28, 1994 was $429.3 million.
(D) At February 28, 1994 and May 31, 1993, CFC had unconditionally guaranteed
commercial paper, along with the related interest rate exchange agreement,
issued by NCSC of $34.6 million and $35.5 million, respectively.
- 13 -
<PAGE> 14
10.Interest Rate Exchange Agreements
As of February 28, 1994 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 February 28, 1994 and May 31, 1993, nonperforming loans in the amount
of $48.5 million and $55.8 million, respectively, were on a nonaccrual
basis with respect to the interest income. At February 28, 1994 and May
31, 1993, the total amount of restructured debt was $174.2 million and
$172.9 million, respectively. CFC elected to apply all principal and
interest payments received against outstanding principal on restructured
debt of $114.9 million and $100.3 million, respectively. At February
28, 1994 and May 31, 1993, CFC has conditionally committed to lend $1.3
million and $23.5 million, and $90.8 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. Since WVPA is operating under the
Bankruptcy Court, CFC has placed this loan on a nonaccrual basis with
respect to interest income recognition. The loan is classified as
nonperforming. As of February 28, 1994, $23.4 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. However,
these sales of power are largely contingent upon market supply/demand
- 14 -
<PAGE> 15
factor for power, the competitive cost of delivered power and 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. If payments are not made
according to the ARO, the ARO may be amended or CFC may exercise its
remedies under its various loan and guarantee documents. At February
28, 1994, CFC had funded $97.3 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 and others.
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 contingently 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 February 28, 1994, CFC had approximately $451.2 million in current
credit exposure on behalf of Deseret consisting of $114.9 million in
secured loans, and $336.3 million for secured guarantees by CFC of
various direct and indirect obligations of Deseret. CFC's guarantees
include $9.4 million in tax-benefit indemnifications, and $32.8 million
relating to mining equipment for a coal supplier of Deseret. The
remainder of CFC's guarantee is for semiannual debt service payments on
$294.1 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 February 28, 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.
- 15 -
<PAGE> 16
12.Loans Guaranteed by REA
At February 28, 1994, CFC held $484.0 million in Trust Certificates related
to the refinancings of Federal Financing Bank loans. These Trust Certif-
icates are supported by payments from certain CFC Power Supply members
which payments are 100% guaranteed by REA.
13.Extraordinary Loss Prior Year
For the nine months ended February 28, 1993, 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.
- 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 nine months ended February 28, total assets increased by
$539.3 million, or 9.9%, to $6,003.4 million from $5,464.1 million at
May 31. This increase in total assets was due to the addition of
$573.5 million in new loans offset by reductions in cash, debt service
investments and other receivables and an increase of $15.6 million in
the allowance for loan and guarantee losses.
At February 28, net loans comprised 94.7% of total assets up from
93.6% at May 31. During the nine months ended, long-term,
intermediate-term and short-term loans increased $182.7 million, $83.4
million and $142.9 million, respectively. In addition, loans
guaranteed by REA increased $186.2 million or 62.6%. However,
nonperforming and restructured loans decreased $6.1 million or 2.7%.
At February 28, nonperforming and restructured loans comprised 3.8%
of gross loans outstanding as compared with 4.3% at May 31.
During the nine months, CFC continued to see loans convert out of the
fixed rate programs. At February 28, variable rate long-term,
intermediate-term and short-term loans, which reprice on a monthly
basis, comprised 46.0%, 2.1%, and 5.9% of the total loan portfolio,
respectively, as compared to 47.5%, 0.8%, and 3.8%, respectively at
May 31. Fixed rate loans comprised 34.0% and 38.0% of total loans
outstanding at February 28 and May 31, respectively.
During the nine months ended, loans to distribution systems, power
supply systems, telecommunication companies, associate and statewide
members, and loans guaranteed by REA increased 5.0%, 36.3%, 16.7%,
0.8% and 62.6%, respectively. At February 28, loans to these groups
comprised 67.0%, 12.7%, 8.8%, 3.3% and 8.2%, respectively, of gross
loans outstanding as compared to 71.0%, 11.0%, 8.7%, 3.6% and 5.6%,
respectively.
At February 28, $328.0 million or 5.6% of gross loans outstanding were
unsecured as compared with $199.2 million or 3.8% at May 31.
Substantially all other loans are secured pro-rata with other lenders
(primarily REA), by all assets and future revenues of the borrower.
As of February 28, CFC had provided $2,692.3 million in guarantees to
its members, a decrease of $121.4 million or 4.3% from $2,813.7
million at May 31. 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.
- 17 -
<PAGE> 18
CFC's top ten borrowers had $2,571.5 million of loans and guarantees
outstanding at February 28. No single borrower had more than 5.3% of
the total credit exposure. By policy, CFC limits its credit exposure,
loans and guarantees, to any one borrower.
At February 28, CFC had committed to lend $5,046.8 million, an
increase of $739.8 million over the $4,307.0 million it had committed
to lend at May 31. This increase is due primarily to a commitment to
fund a potential REA note buyout for a CFC Power Supply Member and to
recent loans approved for telecommunication system members. These
telecommunications loans will be used to finance the purchase of
properties from two large telecommunication companies that have been
divesting their holdings. Management expects to increase the level
of commitments and ultimate loan advances to telecommunication systems
over the next three quarters. 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.
The increase in loans outstanding was funded primarily by the issuance
of commercial paper. Commercial paper was also issued to fund the
redemption/retirement of Series Q and Series R Collateral Trust Bonds.
As a result, there was a net increase in notes payable of $804.0
million during the nine months and a decrease in long-term debt of
$262.6 million. Members' Subordinated Certificates and Members'
Equity remained substantially unchanged during the nine months. CFC's
policy is to match fund, as to rate maturity, its loan portfolio.
The allowance for loan and guarantee losses increased by $15.6 million
from $172.6 million at May 31, to $188.2 million at February 28. At
February 28, the allowance represented 3.2% of gross loans
outstanding, 387.9% of nonperforming loans and 84.5% 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.
Management believes that the allowance for loan and guarantee losses
is adequate to cover any portfolio losses which have occurred or may
occur.
On March 22, 1994, the REA published final regulations governing the
prepayment of existing REA electric loans at a discount based on the
government's cost of capital. Some of CFC's members have expressed
an interest in this program. These members are currently evaluating
the benefits of pursuing a buyout of their REA notes. At this time,
it is difficult for CFC to predict the volume of loans it would expect
to make under such a program.
Series S Collateral Trust Bonds with a face amount of $100,000,000 and
carrying a rate of 9.85% will be redeemed at par on April 18, 1994.
- 18 -
<PAGE> 19
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 nine months ended February 28, 1994, CFC achieved a Times
Interest Earned Ratio ("TIER") of 1.15. A TIER of 1.15 was also
earned during the nine months ended February 28, 1993. TIER for the
nine months ended February 28, 1993, was adversely affected by an
extraordinary loss for the early redemption of the series F collateral
trust bonds. However, the provision for loan and guarantee losses
increased $4.4 million for the nine months ended February 28, 1994 as
compared to the same period the previous year. TIER achieved
excluding the extraordinary loss and the loan and guarantee loss
provision would have been 1.23 and 1.22 for the nine months ended
February 28, 1994 and 1993, respectively.
TIER for the quarters ended February 28, 1994 and 1993 were 1.05 and
1.17, respectively. TIER excluding the loan and guarantee loss
provision would have been 1.23 for both quarters ended February 28,
1994 and 1993.
Liquidity and Capital Resources
At February 28, CFC had $2,900 million in available bank credit,
$2,030 million of which was available until May 1996 and $870 million
available until May 1994. As of February 28, CFC was in compliance
with all covenants and conditions to borrowing. In addition, CFC had
$120 million of short-term bank lines of credit available.
As of February 28, CFC had SEC shelf registrations for Collateral
Trust Bonds and Medium-Term Notes of $300.0 million and $390.9
million, respectively.
Member invested funds, consisting of long- and short-term investments,
members' certificates and equity and the loan loss reserve, at
February 28, were $2,842.4 million or 46.7% of CFC's total
capitalization compared to $2,961.8 million or 53.5% at May 31, 1993.
The decrease is due primarily to the funding of new loan volume with
additional dealer commercial paper sold.
CFC's leverage ratio was 4.56 at February 28, an increase over the
4.41 reported at May 31. The increase in the leverage ratio was
primarily due to the increase in debt required to fund the increase
in loan volume.
- 19 -
<PAGE> 20
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.
- 20 -
<PAGE> 21
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
Senior Vice President and Chief Financial Officer
April 14, 1994
/s/ Angelo M. Salera
Controller (Principal Accounting Officer)
April 14, 1994
- 21 -
