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 telecommunication cooperatives.

Reporting Period: Quarterly period ended February 28, 1995 (Nine months ended February 28, 1995).

Scope: Financials include CFC and its controlled affiliates, Rural Telephone Finance Cooperative (RTFC) and Guaranty Funding Cooperative (GFC).

Key Financial Metrics

Material Changes vs. Prior Period

• Profitability Surge: Net margins increased 53.6% to $44.0 million, driven by a significant reduction in the provision for loan and guarantee losses ($5.6 million vs. $15.6 million prior year) and higher operating income.
• Asset Growth: Total assets grew 10.9% ($680.5 million), primarily due to a $657.8 million increase in net loans to members.
• Cost of Funds: Average cost of funds rose 67 basis points to 5.38%, increasing total cost of funds by $66.6 million due to rate and volume variances.
• Cash Flow Improvement: Net cash flow turned positive ($5.7 million) compared to a negative $38.4 million in the prior year, aided by strong financing activities.
• Debt Structure: Long-term debt increased by $257.2 million, funded by new Collateral Trust Bonds and Medium-Term Notes to support loan growth.

Outlook, Risks, and Contingencies

Management Commentary and Outlook

Management maintains a positive outlook on loan growth, citing applications for $217.3 million in RUS prepayments and $130.9 million in telephone exchange acquisitions. The company targets a minimum Times Interest Earned Ratio (TIER) of 1.10; the current 1.17 ratio indicates healthy coverage.

Liquidity and Capital Resources

CFC maintains $4.05 billion in revolving credit facilities ($2.43 billion available through 2000). The company is in compliance with all financial covenants. Leverage ratio increased slightly to 4.99 from 4.63.

Material Risks and Contingencies

• Deseret Generation & Transmission: CFC has a current credit exposure of $456.4 million (loans and guarantees). Deseret may be unable to satisfy payment obligations by the end of 1995 due to power sales shortfalls. CFC believes reserves are adequate.
• Wabash Valley Power Association: Bankruptcy proceedings continue. CFC expects a total loss of approximately $12 million, with $8.6 million already written off.
• Soyland Power Cooperative: Debt restructuring completed in December 1994. CFC holds $49.3 million in secured loans and $282.9 million in RUS-guaranteed loans.
• Interest Rate Risk: CFC manages risk by matching asset and liability repricing terms. As of Feb 28, 1995, $20.9 million of assets were not match-funded, representing less than 0.5% of gross assets.

Investor Verification Checklist

• Deseret Exposure: Verify the status of Deseret's power sales and ability to service debt, given the $456.4 million exposure.
• Provision Adequacy: Confirm the sustainability of the reduced provision for loan losses ($5.6M) given the large portfolio of nonperforming and restructured loans ($229.1 million combined).
• Refinancing Risk: Monitor the $1.61 billion in notes payable due within one year and the company's ability to roll over commercial paper.
• Regulatory Approvals: Track the Vermont Public Service Board's decision on rate increases for VEC/VEG&T, which impacts settlement proceeds.
• Interest Rate Sensitivity: Assess the impact of rising rates on the cost of funds, which already increased by 67 basis points year-over-year.