<PAGE> 1
FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended November 30, 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 the area code (703) 709-6700
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.YES X NO
Page 1 of 26
<PAGE> 2
<TABLE>
<CAPTION>
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
COMBINED BALANCE SHEETS
(Dollar Amounts In Thousands)
A S S E T S
(Unaudited)
November 30, 1994 May 31, 1994
<S> <C> <C>
Cash $ 24,396 $ 22,168
Marketable Securities 10,000 -
Debt Service Investments 35,682 33,668
Loans To Members, net 6,305,257 5,921,022
Receivables 89,278 90,160
Fixed Assets, net 38,152 38,718
Debt Service Reserve Funds 113,797 107,095
Other Assets 8,123 11,465
Total Assets $ 6,624,685 $ 6,224,296
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)
November 30, 1994 May 31, 1994
<S> <C> <C>
Notes Payable, due within one year $ 1,758,666 $ 1,607,975
Accounts Payable 16,116 18,529
Accrued Interest Payable 39,789 35,597
Long-Term Debt 3,279,655 3,042,068
Other Liabilities 29,503 36,301
Commitments, Guarantees and
Contingencies (Notes 7, 9, 10 and 11)
Members' Subordinated Certificates:
Membership subscription
certificates 637,685 640,520
Loan & guarantee certificates 606,491 582,338
Total Members' Subordinated
Certificates 1,244,176 1,222,858
Members' Equity 256,780 260,968
Total Members' Subordinated Certi-
ficates & Members' Equity 1,500,956 1,483,826
Total Liabilities and Members'
Equity $ 6,624,685 $ 6,224,296
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 Six Months Ended November 30, 1994 and 1993
Quarters Ended Six Months Ended
November 30, November 30,
1994 1993 1994 1993
<S> <C> <C> <C> <C>
Operating Income-Interest on
loans to members $104,513 $ 82,110 $202,498 $162,606
Less-cost of funds allocated 84,941 64,131 163,428 127,579
Gross operating margin 19,572 17,979 39,070 35,027
Expenses:
General, administrative and
loan processing 4,260 4,154 7,943 8,070
Provision for loan and
guarantee losses 1,875 1,875 3,750 3,750
Total expenses 6,135 6,029 11,693 11,820
Operating margin 13,437 11,950 27,377 23,207
Nonoperating Income 1,071 513 1,582 2,412
Net Margins $ 14,508 $ 12,463 $ 28,959 $ 25,619
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 November 30, 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 November 30, 1994
Balance at August 31, 1994 $241,759 $ 1,352 $ 353 $ 16,740 $ 318 $222,996
Retirement of patronage
capital - - - - - -
Net Margins 14,508 - - 14,508 - -
Other 513 14 - - - 499
Balance at November 30, 1994 $256,780 $ 1,366 $ 353 $ 31,248 $ 318 $223,495
Quarter Ended November 30, 1993
Balance at August 31, 1993 $243,656 $ 1,277 $ 313 $ 15,444 $ 193 $226,429
Retirement of patronage
capital - - - - - -
Net Margins 12,463 - - 12,463 - -
Other (783) 23 32 - - (838)
Balance at November 30, 1993 $255,336 $ 1,300 $ 345 $ 27,907 $ 193 $225,591
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 Six Months Ended November 30, 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>
Six Months Ended November 30, 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 28,959 - - 28,959 - -
Other 554 27 28 - - 499
Balance at November 30, 1994 $256,780 $ 1,366 $ 353 $ 31,248 $ 318 $223,495
Six Months Ended November 30, 1993
Balance at May 31, 1993 $258,299 $ 1,247 $ 312 $ 2,289 $ 488 $253,963
Retirement of patronage
capital (27,984) - - - (295) (27,689)
Net Margins 25,619 - - 25,619 - -
Other (598) 53 33 (1) - (683)
Balance at November 30, 1993 $255,336 $ 1,300 $ 345 $ 27,907 $ 193 $225,591
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 Six Months Ended November 30, 1994 and 1993
1994 1993
<S> <C> <C>
Cash Flows From Operating Activities:
Accrual basis net margins $ 28,959 $ 25,619
Add (deduct):
Provision for loan and guarantee losses 3,750 3,750
Depreciation 768 785
Amortization of deferred income (9,231) (9,285)
Amortization of bond issuance costs 644 1,016
Add (deduct) changes in accrual accounts:
Receivables (3,185) (269)
Accounts payable (2,413) (259)
Accrued interest payable 4,192 (6,808)
Deferred Income 1,575 10,769
Other 5,226 264
Net cash flows provided by operating
activities 30,285 25,582
Cash Flows From Investing Activities:
Advances made on loans (1,815,312) (932,967)
Principal collected on loans 1,427,327 630,413
Investments in fixed assets (202) (143)
Net cash flows used in investing activities (388,187) (302,697)
Cash Flows From Financing Activities:
Notes payable, net 150,691 431,695
Debt service and arbitrage investments, net (12,014) (16,992)
Proceeds from issuance of Long-Term Debt 271,762 50,934
Payments for retirement of Long-Term Debt (34,254) (204,195)
Proceeds from issuance of Members' Subordinated
Certificates 21,956 13,612
Payments for retirement of Members' Subordinated
Certificates (3,207) (4,622)
Payments for retirement of patronage capital (34,804) (27,050)
Net cash flows provided by financing activities 360,130 243,382
Net Cash Flows 2,228 (33,733)
Beginning Cash and Cash Equivalents 22,168 55,450
Ending Cash and Cash Equivalents $ 24,396 $ 21,717
Supplemental Disclosure of Cash Flow Information:
Cash paid during six months for interest Exp. $ 160,332 $ 134,982
The accompanying notes are an integral part of these combined financial
statements.
</TABLE>
- 7 -
<PAGE> 8
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 November 30, 1994, included 898 rural
electric utility system members ("Utility Members"), virtually
all of which are consumer-owned cooperatives, 71 service members
and 71 associate members. The Utility Members included 832
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.
On December 5, 1994, the CFC Board of Directors announced their
selection of Mr. Sheldon C. Petersen, effective March 1, 1995,
as CFC's third Governor and Chief Executive Officer since its
incorporation in 1969, to replace the retiring Mr. Charles B.
Gill. Petersen, formerly the Assistant to the Governor, is an
18-year veteran of the rural electric industry.
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 of operations and financial
condition have been combined with those of CFC in the
accompanying financial statements. As of November 30, 1994,
RTFC had 378 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
- 8 -
<PAGE> 9
Utilities Service ("RUS", formerly known as the Rural
Electrification Administration, or "REA"). GFC's results of
operations and financial condition 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 RUS. GFC had four members other than CFC at November 30,
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 November 30, 1994 and May 31, 1994, and the combined results
of operations, cash flows and changes in members' equity for the
six months ended November 30, 1994 and 1993.
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 November 30, 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 November 30, 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 $1,159.4 million and
$1,135.4 million as of November 30, 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 November 30, At May 31,
1994 1994
(Dollar Amounts In Thousands)
<S> <C> <C>
Outstanding loans to members
and their affiliates $869,190 $653,644
Total assets 976,850 743,761
Notes payable to CFC 869,190 653,644
Total liabilities 881,671 663,810
Members' Equity and
Subordinated Certificates 95,179 79,951
</TABLE>
- 9 -
<PAGE> 10
<TABLE>
<CAPTION>
For the Six Months Ended November 30,
1994 1993
(Dollar Amounts In Thousands)
<S> <C> <C>
Operating income $23,839 $13,983
Net margins 993 898
</TABLE>
<TABLE>
<CAPTION>
Summary financial information relating to GFC is presented
below:
At November 30, At May 31,
1994 1994
(Dollar Amounts In Thousands)
<S> <C> <C>
Outstanding loans to members $424,765 $524,081
Total assets 442,274 540,913
Notes payable to CFC 430,975 531,302
Total liabilities 441,216 539,521
Members' Equity 1,058 1,392
</TABLE>
<TABLE>
<CAPTION>
For the Six Months Ended November 30,
1994 1993
(Dollar Amounts In Thousands)
<S> <C> <C>
Operating income $11,498 $5,625
Net margins 832 734
</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 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).
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.
- 10 -
<PAGE> 11
3. Loans Pledged as Collateral to Secure Collateral Trust Bonds
As of November 30, 1994 and May 31, 1994, mortgage notes
representing approximately $717.8 million, related to
outstanding long-term loans to members, were pledged as
collateral to secure Collateral Trust Bonds issued under the
1972 Indenture. Additionally, as of November 30, 1994 and May
31, 1994, mortgage notes representing approximately $221.7
million and $0 million respectively, related to outstanding
long-term loans to members were pledged as collateral to secure
Collateral Trust Bonds issued under the 1994 Indenture. Both
the 1972 Indenture and the 1994 Indenture require that CFC
pledge eligible mortgage notes (or other permitted assets) as
collateral that at least equal the outstanding balance of
Collateral Trust Bonds. Under CFC's revolving credit agreement
(See Note 6), CFC cannot pledge mortgage notes in excess of 150%
of Collateral Trust Bonds outstanding.
Collateral Trust Bonds outstanding under the 1972 Indenture at
November 30, 1994 and May 31, 1994 were $539.0 million and
$539.9 million, respectively. Collateral Trust Bonds
outstanding under the 1994 Indenture at November 30, 1994 and
May 31, 1994 were $150.0 million and $0 million, respectively.
4. Allowance for Loan and Guarantee Losses
CFC maintains an allowance for loan and guarantee losses at a
level considered to be adequate in relation to the quality and
size of its loan and guarantee portfolio. It is CFC's policy
to periodically review 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 November 30, 1994 and May 31, 1994, such allowance was
$191.9 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 based on the principal balance of
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
- 11 -
<PAGE> 12
established in connection with the bond issue, and any earnings
from the investment of the fund inure solely to the benefit of
the member.
6. Credit Arrangements
As of November 30, 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.
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 RUS 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 November
30, 1994 and May 31, 1994, CFC was in compliance with all
covenants and conditions. There were no borrowings outstanding
under the revolving credit agreements.
- 12 -
<PAGE> 13
At November 30, 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 November 30,
1994 and May 31, 1994, CFC had $645.0 million and $610.0
million, respectively, 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 November 30, 1994 and May 31, 1994, CFC had unadvanced
loan commitments, summarized by type of loan, as follows:
<TABLE>
<CAPTION>
(Dollar Amounts In Thousands)
November 30, 1994 May 31, 1994
<S> <C> <C>
Long-term $1,396,736 $1,375,078
Intermediate-term 262,950 275,072
Short-term 3,161,085 2,992,023
Telecommunications 289,779 481,744
Associate Member 66,120 63,613
Nonperforming (See Note 11(b)) 10,000 -
Restructured (See Note 11(c)) 20,000 20,000
Total unadvanced loan
commitments $5,206,670 $5,207,530
</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 $33.7 million was retired on
August 31, 1994, representing one-sixth of the total allocations
- 13 -
<PAGE> 14
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 November 30, 1994 and May 31, 1994, CFC had guaranteed the
following contractual obligations of its members:
<TABLE>
<CAPTION>
(Dollar Amounts In Thousands)
November 30, 1994 May 31, 1994
<S> <C> <C>
Long-term tax-exempt bonds (A) $1,509,385 $1,494,200
Debt portions of leveraged lease
transactions (B) 631,299 646,472
Indemnifications of tax benefit
transfers (C) 401,557 414,512
Other guarantees (D) 111,000 100,643
Total guarantees $2,653,241 $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
some of these issues of bonds. Of the amounts shown, $1,205.9
million and $1,214.6 million as of November 30, 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.
(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.
- 14 -
<PAGE> 15
(D) At November 30, 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
CFC enters into interest swaps to manage its interest rate risk.
As of November 30, 1994 and May 31, 1994, CFC had $280.0 million
and $130 million, respectively, outstanding in interest rate
exchange agreements. According to agreements related to $130
million, CFC pays a fixed rate of interest and receives interest
based on a variable rate. According to agreements related to
$150 million, CFC pays a variable rate of interest and receives
interest based on a variable rate. CFC contracted the $150
million interest rate exchange agreement in conjunction with the
issuance of $150 million in variable rate Collateral Trust Bonds,
Series 1994-A, due September 15, 1996. The net cost of the
interest rate exchange agreements to CFC is included in the cost
of funds.
CFC is exposed on these interest rate swap agreements to interest
rate risk if the counterparty to the interest rate swap agreement
does not perform to the agreement's terms. CFC does have a
policy intended to limit counterparty credit risk by maintaining
swap agreements only with financial institutions with at least a
AA long-term credit rating.
11. Contingencies
(A) At November 30, 1994 and May 31, 1994, nonperforming loans in
the amount of $42.3 million and $44.9 million, respectively,
were on a nonaccrual basis with respect to interest income.
At November 30, 1994 and May 31, 1994, the total amount of
restructured debt was $172.9 million and $165.4 million,
respectively. CFC elected to apply all principal and
interest payments received against principal outstanding on
restructured debt of $119.0 million and $111.5 million,
respectively. At November 30, 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 as long-term 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.
- 15 -
<PAGE> 16
In May 1993, CFC advanced $24.4 million in variable interest
rate secured loans 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
the loans on a non-accrual basis with respect to interest
income recognition. The loans are classified as
nonperforming. As of November 30, 1994, $22.0 million was
outstanding to WVPA.
On June 22, 1994, the U.S. District Court affirmed (over
RUS's objection) the Wabash plan in reorganization. RUS has
filed a notice of appeal. Wabash presented for approval by
the Bankruptcy Court a priority credit facility in the amount
of $10.0 million. The Court approved Wabash obtaining credit
at a lower amount than $10 million, CFC has determined that
it would provide such a financing with a priority lien. A
hearing is expected during the next few months. 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 RUS 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 RUS to true-up the cash
distribution between RUS and CFC.
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 RUS, 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
- 16 -
<PAGE> 17
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 November 30, 1994, CFC
had funded $101.4 million of the shortfall. CFC's current
exposure of $449.3 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.
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 November 30, 1994, CFC had approximately $449.3 million
in current credit exposure on behalf of Deseret consisting of
$119.1 million in secured loans, and $330.2 million for
guarantees by CFC of various direct and indirect obligations
of Deseret. CFC's guarantees include $9.0 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 November 30, 1994, there
was no balance outstanding under this line of credit.
- 17 -
<PAGE> 18
During the calendar year 1994 Deseret made monthly cash
payments to CFC which equaled the amount due under the ARO.
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. As a result, despite these high rates
Soyland was unable to realize revenues sufficient to meet
all of their requirements. Soyland, RUS and CFC entered into a
debt restructuring agreement, dated as of December 15, 1994, which
restructured Soyland's indebtedness to RUS. 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 RUS loans and the prior CFC loan.
At November 30, 1994, CFC had $49.4 million in outstanding
long-term loans to Soyland which were secured equally and
ratably with the RUS on all assets and future revenues of
Soyland. In addition, CFC had $4.9 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 $286.0 million in loans to Soyland which are
guaranteed by the U.S. Government (RUS). During the second
quarter, Soyland fixed the rate on $93.7 million through the
sale of trust certificates to private investors, thereby
reducing the balance of variable rate trust certificates held
by CFC by $93.7 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 Cooperative, ("VEC"), have
both borrowed from RUS and CFC. Some of the RUS 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 RUS debt. VEC and VEG&T have been unable to raise
rates, which has caused their cash flows to be insufficient
to service the RUS 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. A debt restructure plan and a
rate increase for the cooperatives is before the Vermont
Public Service Board ("PSB"). On December 30, 1994, the PSB
- 18 -
<PAGE> 19
ordered VEC to file the completed debt restructure agreement
with the PSB by January 13, 1995 and the completed contract
for power supply arrangements by January 20, 1995. The PSB
further stated that if VEC misses either date, the pending
rate increase, necessary to fund obligations under the
proposed debt restructuring agreement, will be declared null
and void.
At November 30, 1994, VEC owed principal in the amount of
$15.0 million to RUS and $1.9 million to CFC, all of which is
secured. At November 30, 1994, VEG&T owed principal in the
amount of $48.3 million of secured debt to RUS and $5.0
million of unsecured debt to CFC. CFC has secured a
judgement for the VEG&T obligations to CFC against both VEG&T
and 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 RUS
At November 30, 1994, CFC held $434.2 million in Trust
Certificates related to the refinancings of Federal Financing
Bank loans. These Trust Certificates are supported by payments
from certain CFC Power Supply members whose payments are
guaranteed by RUS. During the second quarter, Soyland fixed the
rate on $93.7 million through the sale of trust certificates to
private investors, thereby reducing the balance of variable rate
trust certificates held by CFC by $93.7 million. Additionally,
$5.6 million in scheduled service payments were made during the
second quarter.
- 19 -
<PAGE> 20
Part I. Item 2.
Management's Discussion and Analysis of Financial
Condition and Results of Operations
Changes in Financial Condition
During the six months ended November 30, 1994, CFC's total assets
increased by $400.4 million or 6.4% to $6,624.7 million from $6,224.3
million at May 31, 1994, primarily due to increases of $384.3 million
in net loans outstanding and $12.2 million in cash and marketable
securities. Changes to the loan portfolio included increases of
$469.3 million in long-term loans and $52.2 million in short-term
loans offset by decreases of $39.0 million in intermediate-term loans
and $99.3 million in RUS guaranteed loans. Additionally, during the
first quarter there was $506.4 million in line of credit renewals
which resulted in the rollover of existing principal balances during
the first quarter.
Long-term loan activity consisted primarily of $707.9 million in
advances and $236.5 million in principal repayments. Long-term loan
advances of $707.9 included $200.4 million in RUS prepayments to 12
members financed by CFC, and $194.6 million in telephone exchange
acquisitions to 35 members financed by RTFC. Additionally, the
increase of $52.2 million in short-term loans is due to advances
utilized for RUS prepayments that are expected to be converted to
long-term financing.
Another positive trend in CFC's loan portfolio relates to $36.2
million in net loan conversions from the variable rate to a fixed
rate. This consists of $57.6 million in conversions from a variable
to a fixed rate and $21.4 million in conversions from a fixed to a
variable rate. This is a recent reversal of a fiscal year 1994 and
1993 trend of net loan conversions to a variable rate.
Net loans to members represented 95% of total assets at November 30
and May 31, 1994. Long-term loans represented 86% and 84% of gross
loans at November 30 and May 31, 1994. Fixed rate loans represented
36% of gross loans at November 30 and 34% at May 31 and the remaining
loans carry a variable rate that may be adjusted monthly or semi-
monthly. At November 30, only $494.2 million or 7.6% 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 RUS),
by all assets and future revenues of the borrower.
At November 30, CFC had provided $2,653.2 million in guarantees, a
decrease of $2.6 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. During the second quarter, CFC guaranteed an
additional $31.2 million in tax-exempt solid waste disposal revenue
bonds which was offset by scheduled payments and the replacement of
a $5.0 million leverage lease with a CFC long-term loan.
- 20 -
<PAGE> 21
Also at November 30, CFC had committed to lend $5,206.7 million, a
decrease of $.8 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 six months ended November 30, CFC's total liabilities and
members' equity increased by $400.4 million or 6.4% to $6,624.7
million from $6,224.3 million at May 31. The increase was primarily
due to an increase of $150.7 million in notes payable, $237.6 million
in long-term debt, $24.2 million in loan and guarantee subordinated
certificates, and $29.0 million in unallocated margins partially
offset by a decrease of $33.2 million in patronage capital.
The notes payable increase of $150.7 million is due to increases of
$33.9 million in Dealer Commercial Paper, $50.8 million in Member
Commercial Paper and $66.0 million in Bank Bid Notes. The $237.6
million increase in long-term debt is due to increases of $149.1
million in Collateral Trust Bonds and $88.5 million in Medium-Term
Notes. CFC's Management views the increase in Member Commercial Paper
and Medium-Term Notes of $140.4 as a strong sign of support from its
membership.
During the second quarter, CFC issued $150.0 million in variable rate
Collateral Trust Bonds, Series 1994-A, due September 15, 1996. The
bonds are not redeemable prior to maturity. The variable rate index
for this transaction will be the one month London Inter Bank Offered
Rate (LIBOR). In order to facilitate eliminating the basis risk
between the one month LIBOR and commercial paper (CFC's principle
variable rate funding source), CFC contracted through a swap agreement
to exchange interest payments by CFC receiving the same one month
LIBOR rate index and paying a commercial paper indexed rate.
The increase to notes payable and long-term debt was required to fund
the increase in loans outstanding. The increase in subordinated
certificates was due to new loans and guarantees. The decrease in
patronage capital was primarily due to a $33.7 million retirement of
patronage capital.
The allowance for loan and guarantee losses increased by $3.7 million
to $191.9 million at November 30, from $188.2 million at May 31. At
November 30, the loan and guarantee loss allowance represented 2.95%
of gross loans, 2.10% of gross loans and guarantees, 89.20% of
nonperforming and restructured loans, and 452.60% 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 November 30,
management believes that the allowance for loan and guarantee losses
is adequate to cover any portfolio losses which have occurred or may
occur.
- 21 -
<PAGE> 22
CFC has been the selected lender for an estimated 82% of the total RUS
prepayments. Management has a positive outlook on future loan growth
due to Member loan applications to CFC for an additional $221.9
million in RUS prepayments to 9 members and loan applications to RTFC
for an additional $131.3 million in telephone exchange acquisitions
to 28 members.
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 six months ended November 30, 1994, CFC achieved a Times
Interest Earned Ratio (TIER) of 1.18. This was a decrease from the
1.20 TIER for the six months ended November 30, 1993. Management has
established a 1.10 TIER as its minimum operating level.
Operating income for the six months ended November 30, 1994, was
$202.5 million, an increase of $39.9 million from the prior year. The
increase in operating income was due to a positive rate variance of
$14.1 million and a positive volume variance of $25.8 million. At
November 30, 1994 average loans outstanding were $6,333.9 million and
the average yield on loans outstanding was 6.38%, compared to average
loans outstanding of $5,378.1 million and an average yield of 6.03%
at November 30, 1993.
CFC's cost of funds for the six months ended November 30, 1994,
totaled $163.4 million, an increase of $35.8 million from the prior
year. The increase was due to a positive rate variance of $23.2
million and a positive volume variance of $12.6 million. The average
cost of funds rate, at November 30, 1994, was 5.15%, an increase of
42 basis points compared to the average rate of 4.73% at November 30,
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.
For the six months ended November 30, 1994, general and administrative
expenses of $7.9 million represented 25 basis points of average loan
volume, a decrease of $0.2 million from the six months ended November
30, 1993 expenses of $8.1 million and 30 basis points of average loan
volume.
The provision for loan and guarantee losses for the six months ended
November 30, 1994, totaled $3.7 million or 12 basis points, compared
to the prior year total of $3.7 million or 14 basis points. CFC has
maintained the provision for loan and guarantee loss in line with
management's assessment of the size and quality of the loan portfolio.
- 22 -
<PAGE> 23
Overall CFC's net margins for the six months ended November 30, 1994,
totaled $29.0 million, an increase of $3.4 million over the prior
year. Net margins for the six months ended November 30, 1993, totaled
$25.6 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 maturing liabilities. 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 SEC 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 maintains SEC registrations for the Grantor Trust
Certificates which permits public issuance. Fifth, CFC obtains much
of its funding directly from its members and believes this funding is
more stable than funding obtained from outside sources.
At November 30, 1994, CFC had $3,545.0 million in available credit,
$2,030.0 million of which is available through June 3, 1996 and $870.0
million is available through May 26, 1995. As of November 30, CFC was
in compliance with all covenants and conditions to borrowing. In
addition, CFC had $645.0 million in short-term bank lines of credit
available at November 30, 1994.
As of November 30, 1994, CFC had shelf registrations for Collateral
Trust Bonds and Medium-Term Notes of $150 million and $206.9 million,
respectively. As of November 30, 1994, CFC had SEC shelf
registrations for Grantor Trust Certificates of $139.4 million.
Member invested funds,including the loan loss reserve, at November 30,
1994 and May 31, 1994, were $3,063.3 million and $2,905.6 million or
45.5% 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 4.89 at November 30, 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 November 30, 1994,
compared to May 31, 1994. Additionally, the increase was due to
- 23 -
<PAGE> 24
additional debt required to fund new loans for November 30, 1994
compared with May 31, 1994.
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 fiscal
year. At November 30, 1994, CFC had $147.8 million in fixed rate
assets amortizing or repricing and $89.5 million in fixed rate
liabilities maturing during the remainder of fiscal year 1995. The
difference, $58.8 million, represents the amount of CFC's assets that
are not considered match-funded as to interest rate. CFC's difference
of $58.8 million at November 30, 1994 represents .89% of gross assets.
- 24 -
<PAGE> 25
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
B. Reports on Form 8-K.
None
- 25 -
<PAGE> 26
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
January 13, 1994
/s/ Angelo M. Salera
Controller (Principal Accounting Officer)
January 13, 1994
- 26 -
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND> This Schedule Contains Summary Financial
Information Extracted From The November
30, 1994, Form 10-Q And Is Qualified In
Its Entirety By Reference To Such
Financial Statements
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> May-31-1994
<PERIOD-END> Nov-30-1994
<CASH> 24,396
<SECURITIES> 10,000
<RECEIVABLES> 89,278
<ALLOWANCES> 0
<INVENTORY> 6,305,257
<CURRENT-ASSETS> 6,464,613
<PP&E> 44,256
<DEPRECIATION> 6,104
<TOTAL-ASSETS> 6,624,685
<CURRENT-LIABILITIES> 1,844,074
<BONDS> 3,279,655
0
0
<COMMON> 0
<OTHER-SE> 1,500,956
<TOTAL-LIABILITY-AND-EQUITY> 6,624,685
<SALES> 202,498
<TOTAL-REVENUES> 204,080
<CGS> 163,428
<TOTAL-COSTS> 163,428
<OTHER-EXPENSES> 7,943
<LOSS-PROVISION> 3,750
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 28,959
<INCOME-TAX> 0
<INCOME-CONTINUING> 28,959
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 28,959
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
