NRUC

Business Context and Reporting Period

Company: National Rural Utilities Cooperative Finance Corporation (CFC), a private, not-for-profit cooperative providing financing to rural electric and telecommunications cooperatives.

Reporting Period: Quarterly Report (Form 10-Q) for the period ended February 28, 1999 (Nine months ended Feb 28, 1999 vs. Feb 28, 1998).

Structure: Financials are combined with controlled affiliates Rural Telephone Finance Cooperative (RTFC) and Guaranty Funding Cooperative (GFC).

Key Financial Metrics

Performance (Nine Months Ended Feb 28, 1999)

• Net Margins: $56.7 million (vs. $45.6 million prior year).
• Gross Operating Margin: $89.3 million (vs. $69.7 million prior year).
• Interest Income: $572.5 million.
• Cost of Funds: $483.2 million.
• Provision for Loan Losses: $15.8 million.
• Times Interest Earned Ratio (TIER): 1.12 (Management minimum objective: 1.10).
• Net Cash Flow: $10.8 million provided by operations, investing, and financing activities combined.

Material Changes vs. Prior Period

• Loan Portfolio Growth: Net loans increased by $2.7 billion (26%), driven by strong economic demand, RUS waiting periods, and member buyouts of RUS debt. Long-term loans increased by $2.3 billion.
• Debt Structure Shift: Fixed-rate debt increased from 39% to 58% of total debt, while variable-rate debt decreased from 61% to 42%. This aligns with a shift in the loan portfolio where fixed-rate loans rose from 46% to 64%.
• Guarantees Reduction: Total guarantees outstanding decreased by $306 million to $1.7 billion, primarily due to the redemption of bonds financing the Deseret Bonanza generating plant.
• Unadvanced Commitments: Increased by $2.8 billion to $11.6 billion, largely due to the "Power Vision" pre-approval program.
• Leverage: Leverage ratio increased from 6.37 to 6.84; Debt/Equity ratio increased from 4.51 to 5.23.

Outlook, Risks, and Contingencies

Management Commentary & Outlook

Management anticipates modest increases in the leverage ratio as external capital is obtained to accommodate loan growth. The company maintains a policy to limit fixed-rate loans funded by variable-rate debt to 5% of total assets; however, this temporarily exceeded the limit (5.7%) due to a stable short-term rate environment and specific restructured loan decisions.

Material Risks and Contingencies

• Deseret Generation & Transmission: Total exposure is $637.7 million (loans and guarantees). Deseret is current on minimum payments. Litigation with the City of Riverside regarding a power sales agreement is pending before FERC, with a hearing scheduled for May 1999. Management believes reserves are adequate.
• Wabash Valley Power Association: A $37.4 million write-off related to a true-up payment was recorded in March 1999 (post-period). A specific reserve was sufficient to cover this.
• Saluda River Electric Cooperative: CFC anticipates a write-off of approximately $21 million related to a debt restructuring and bond defeasance scheduled for April 15, 1999. Exposure is currently $36.2 million.
• Nonperforming/Restructured Loans: Restructured loans increased to $584.2 million (3.88% of portfolio). All restructured loans were placed on accrual status at 3.90% on February 1, 1999.
• Interest Rate Risk: Primary market risk. Mitigated through interest rate exchange agreements (notional amount $2.78 billion) and gap analysis.
• Liquidity Risk: Mitigated by $4.79 billion in revolving credit agreements and active shelf registrations.

Investor Verification Checklist

• Reserve Adequacy: Verify the sufficiency of the $264 million loan loss allowance against the $586 million in nonperforming and restructured loans, specifically regarding the Deseret and Saluda exposures.
• Upcoming Write-offs: Confirm the impact of the anticipated $21 million Saluda write-off and the $37.4 million Wabash write-off on future earnings.
• Liquidity Coverage: Assess the reliance on rolling over $5.6 billion in Commercial Paper and the status of the $4.8 billion credit facility.
• Interest Rate Sensitivity: Review the impact of the 5.7% fixed-rate funding gap (exceeding the 5% policy limit) on future margins if short-term rates rise.
• Deseret Litigation: Monitor the outcome of the FERC hearing regarding the Riverside power sales agreement, which could affect Deseret's ability to service its debt.