Rural Development: Investment Limitation by RTB Borrowers

Published by the Government Accountability Office on 1990-02-05.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

      United States
GAO   General Accounting Office
      Washington. D.C. 20548

      Accounting and Financial
      Alansgement Division


      February      5, 1990
      The Honorable  Robert E. Wise, Jr.
      Chairman,  Subcommittee    on Government             Information,
        Justice  and Agriculture
      Committee on Government Operations
      House of Representatives
      Dear Mr. Chairman:
      Your letter    of January 22, 1990, asked for information            on
      section    24 of H.R. 3564 and section       724 of H.R. 3581.
      These sections     contain  an identical     provision   to encourage
      a broad range of investments       in rural development       projects
      by Rural Electrification      Administration       (REA) and Rural
      Telephone    Bank (RTB) telephone      loan borrowers.     Borrowers
      must have a net worth of at least 20 percent            of their   total
      assets to participate      and may invest     up to one third     of
      their   net worth in rural development        projects.
      To determine      how the proposed legislation              could affect
       repayment of REA and RTB telephone               loans,    we analyzed
      selected    financial       data on telephone        loan borrowers.       As
      agreed with your office,            we requested       that REA and RTB
      provide    us with summary information              on the financial
      position    and operating        results     of these borrowers.         REA and
      RTB provided      us with data on borrowers              as of December 31,
      1988.     We did not verify         the accuracy of the data.           A
      discussion     of the financial          data for the eligible       telephone
      loan borrowers        follows.
      As of December 31, 1988, of 964 rural telephone            borrowers,
      804, or 83 percent,   had a ratio   of net worth to total
      assets of at least 20 percent.      Financial     information      on
      these 804 rural telephone   borrowers    includes      the following.
      --   The 804 borrowers      had total     assets      of $14,833    million,
           total liabilities      of $8,930     million,      and total    net worth


     of $5,903 million.        Their average net worth was
     40 percent      of total  assets against debt of 60 percent of
     total   assets.      This amount of net worth provides  these
     borrowers    with a cushion to repay debt when due.
--   The bills'    provision    that allows borrowers      to invest    up
     to one third     of net worth could generate       investments     of
     $1,968 million,       or an average of $2.4 million       per
     borrower.     We did not determine      whether this amount is
     sufficient    to fund a rural     development   project    without
     additional    borrowing    or pooling   of net worth from
     eligible   RTB borrowers.
--   The borrowers      held net telephone       plant assets of $11,535
     million,    or 78 percent of total         assets.     Total telephone
     plant,   including      accumulated    depreciation      of $6,386
     million,    amounted to $17,921 million.            The high
     percentage     of total     assets invested      in telephone    plant
     limits   cash available        for other investments.
--   Investments    in affiliates, other investments,      and other
     noncurrent    assets which are considered   nonliquid
     accounted   for $713 million,  or 5 percent   of total
--   The borrowers        had cash and equivalents             of $1,371 million
     and other current             assets of $1,214 million,         which
     together     account for 17 percent of total                assets.     They
     had current       liabilities        of $1,748 million,       with a ratio
     of current      assets to current          liabilities      of 1.48.     In
     order to invest           cash in rural development          projects,
     telephone      borrowers        would have to use their         current
     assets,     reducing        the amount available        to meet current
     liabilities       and operating        expenses.       Borrowers would
     have to balance their              cash flow between the amount of
     investment      funds needed (up to the one third                of net
     worth limit)        and the amount of cash needed to sustain
--   Total net income for the year ended December 31, 1988,
     was $1,105 million       after  provision     for federal     income
     taxes of $353 million.         Dividends    for 1988 were
     $558 million,      or 50 percent of net income.           Although
     high, this is not an unusual dividend            payout for utility
     operations.      In the event of cash flow difficulties,
     cash dividends      could be reduced or postponed to provide
     cash for debt repayment.          According    to their    standard
     borrower's    agreement,     REA and RTB can suspend payment of

2                                                            GAO/AFMD-90-51FS

     dividends      if    federal    government      debt    is endangered        or
     past due.
     Their interest       expense for 1988 was $341 million,                  with
     an interest      to income earned ratio            of 5.3.      This ratio
     is considered       adequate by financial            analysts.      As
     discussed     with your office,          information       on the amount of
     principal     repayments       on the 30-year REA and RTB loans
     was not readily       available      to determine        its effect      on
     cash flows.        The standard      borrower's       agreement provides
     that borrowers       must obtain       an annual financial          audit by
     an independent       certified      public     accountant      and submit an
     annual report.        These requirements           provide     some
     assurance     that the viability           of a borrower's       financial
     operations      can be properly       monitored       by REA and RTB and
     thereby    provide    some early       warning of financial          trouble.
     Should a payment problem occur,                it could be addressed
     through a reduction          of dividends        or a debt rescheduling.

The data we reviewed indicate           that telephone         loan borrowers
have a satisfactory         net worth, are limited         in the amount of
cash available        for investment,     and have an adequate
interest     to income earned ratio.          In addition,        several
mechanisms to limit         potential   financial    difficulties         are
available,       such as decreased cash dividends,            debt
rescheduling,        and close monitoring       of borrowers'       financial
audit    results.
Also, the proposed legislation             is more restrictive                to
telephone     borrowers   than current        investment          authority        for
electric     borrowers.     The omnibus Budget Reconciliation                        Act
of 1987 (7 U.S.C. 940b) authorized               electric         borrowers        to
 invest    up to 15 percent     of their     total       utility       plant assets
 in rural    community infrastructure           projects         without      REA
approval.       If this criterion       were applied           to eligible
telephone     loan borrowers,      15 percent of their               total
telephone     plant would amount to $2,688 million.                        This
amount is about 46 percent of their                total       net worth,        rather
than the one-third      limit     specified      in the proposed
On January 16,           1990, we briefed   your office            on the results
of our analysis           contained  in this letter.             If you or any of


your staff    would like to discuss        further  the information
provided   or need additional       assistance,    please call me or
Roger Stoltz,     Assistant   Director,     at 275-9406.
Sincerely   yours,

Robert W. Gramling
Director, Corporate     Financial   Audits


4                                                 GAO/AFMD-90-51PS