Business Context and Reporting Period
This 10-K filing covers the Rural Electric Cooperative Grantor Trust (KEPCO) Series 1997, a pass-through entity formed to hold lender loan notes from Kansas Electric Power Cooperative, Inc. (KEPCO). The reporting period is the fiscal year ended December 31, 1998. The Trust has no common stock; it issues certificates of beneficial interest with one record holder as of year-end. The Trust's primary function is to pass interest income from a fixed-rate note (7.597%) to certificate holders via a variable-rate structure hedged by an interest rate swap with Morgan Guaranty Trust Company of New York.
Key Financial Metrics
| Metric | 1998 | 1997 |
|---|---|---|
| Total Assets | $56,996,188 | $57,695,694 |
| Total Liabilities | $56,996,188 | $57,695,694 |
| Notes Receivable (Principal) | $56,390,000 | $57,390,000 |
| Total Income | $7,629,686 | $305,694 |
| Total Expenses | $7,629,686 | $305,694 |
| Net Income | $0 | $0 |
| Cash Flow from Operations | $0 | $0 |
| Cash Flow from Investing | $0 | $0 |
Liquidity and Debt: The Trust holds no cash. Its sole asset is a note receivable from KEPCO. Liabilities consist entirely of the outstanding certificates ($56,390,000) and accrued interest/payables. The Trust operates on a pass-through basis, resulting in zero net income and zero retained earnings.
Material Changes vs. Prior Period
- Principal Reduction: The outstanding principal balance of the Note Receivable and Certificates decreased by $1,000,000, from $57,390,000 in 1997 to $56,390,000 in 1998, due to scheduled principal payments.
- Income/Expense Volume: Total income and expenses increased significantly from $305,694 in 1997 to $7,629,686 in 1998. This reflects the full year of operations in 1998 compared to a partial period in 1997 following the refinancing and termination of prior trusts (K-1 and K-2) in December 1997.
- Accruals: Interest receivable and payable balances increased proportionally with the full year of accruals in 1998.
Outlook, Risks, and Contingencies
Management Commentary and Structure: The Trust is designed to mitigate interest rate risk. It holds a fixed-rate asset (7.597%) and issues variable-rate certificates. An interest rate swap with Morgan Guaranty Trust Company of New York converts the fixed asset income into variable income to match certificate obligations. The swap notional amount matches the outstanding principal of the notes.
Risks and Contingencies:
- Counterparty Risk: The variable interest payments to certificate holders depend on the creditworthiness of the swap counterparty (Morgan). If Morgan fails to make payments and the swap terminates without replacement, certificate holders would receive the fixed-rate interest from the underlying note instead of the variable rate.
- Guarantee Structure: Principal payments are backed by a guarantee from the United States (via the Rural Utilities Service). Interest payments are bifurcated: principal relies on the U.S. guarantee, while variable interest relies on the swap counterparty.
- Liquidity: There is no established trading market for the certificates. The Trust holds no cash; all cash flows are passed through immediately.
Future Payments: Principal payments are scheduled over 20 years. Scheduled principal payments for the next five years are: 1999 ($1.1M), 2000 ($1.2M), 2001 ($1.4M), 2002 ($1.35M), and 2003 ($1.7M).
Investor Verification Checklist
- Verify the credit status of the swap counterparty, Morgan Guaranty Trust Company of New York, as it is critical for variable interest payments.
- Confirm the continued validity of the U.S. government guarantee on the underlying Rural Electrification Administration (RUS) loan.
- Review the specific terms of the interest rate swap agreement to understand termination triggers and replacement procedures.
- Check the schedule of principal payments to ensure alignment with the Trust's cash flow projections.
- Confirm that the Trust maintains its tax-exempt status as a grantor trust, as advised by counsel.