Rural Development: Financial Condition of the Rural Utilities Service's Electricity Loan Portfolio

Published by the Government Accountability Office on 1997-07-08.

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

                    United States General Accounting Office

GAO                 Testimony
                    Before the Committee on Agriculture, Nutrition, and
                    U.S. Senate

For Release
on Delivery
Expected at
                    RURAL DEVELOPMENT
9 a.m. EDT
July 8, 1997
                    Financial Condition of the
                    Rural Utilities Service’s
                    Electricity Loan Portfolio
                    Statement of Robert E. Robertson,
                    Associate Director, Food and Agriculture Issues,
                    Resources, Community, and Economic
                    Development Division

    Mr. Chairman and Members of the Committee:

    We are pleased to be here today to discuss the electricity loan program of
    the U.S. Department of Agriculture’s (USDA) Rural Utilities Service (RUS).
    You asked us to summarize our April 1997 report,1 which discusses, among
    other things, (1) the financial condition of the electricity loan portfolio and
    (2) the financial characteristics of borrowers having electricity loans.2 Our
    report presents data on the financial condition of the electricity loan
    portfolio as of the end of fiscal year 1996 and on the financial
    characteristics of borrowers having electricity loans as of the end of
    calendar year 1995, which was the most recent year for which RUS had
    information available on the program’s borrowers. The report did not
    focus on evaluating the potential impact of increasing competition on RUS’
    loan portfolio.

    In summary, the total amount of the outstanding principal on RUS’
    electricity loans was $32.3 billion at the end of fiscal year 1996. Of this
    amount, about $8 billion, or almost 25 percent, was owed by 12 borrowers
    that were experiencing financial problems (i.e., they were delinquent, in
    bankruptcy, or likely to default on loan repayment in the future). These 12
    electricity loan borrowers represent less than 2 percent of the total
    number of electricity loan borrowers.

    This relatively high dollar amount of problem loans exists even though RUS
    had written off some borrowers’ debts in recent years. Specifically, RUS
    wrote off almost $1.05 billion in electricity loans during the 5-year period
    from fiscal year 1992 through fiscal year 1996.

    Our April 1997 report also assessed selected financial characteristics for
    RUS’ electricity loan borrowers at the end of calendar year 1995. The
    financial characteristics for most of the borrowers were favorable, but
    some were not. Specifically, the year-end reports from the borrowers to
    RUS showed the following:

•   Almost 99 percent of the 855 electricity loan borrowers had positive equity
    at the end of 1995. A total of 841 borrowers had equity of $1 million or

     Rural Development: Financial Condition of the Rural Utilities Service’s Loan Portfolio
    (GAO/RCED-97-82, Apr. 11, 1997).
     RUS operates the loan programs formerly administered by other USDA agencies. In this statement
    and in our April 1997 report, we refer to these loans and programs as RUS’ loans and programs.

    Page 1                                                                          GAO/T-RCED-97-198
             •   About 96 percent of the 855 electricity loan borrowers made a profit in
                 1995. A total of 789 borrowers made a profit of $100,000 or more.
             •   However, 10 electricity loan borrowers had negative equity at the end of
                 1995. Also, 38 electricity loan borrowers did not make a profit in 1995.

                 USDA  is the federal government’s principal provider of loans used to assist
Background       the nation’s rural areas in developing their utility infrastructure. Through
                 RUS, USDA finances the construction, improvement, and repair of electrical
                 systems. In addition, RUS provides financing for telecommunications and
                 water and waste disposal systems. The agency provides credit assistance
                 through direct loans and through repayment guarantees on loans made by
                 other lenders.

                 Electricity loans are made primarily to electric cooperatives; more than
                 99 percent of the borrowers with electricity loans are nonprofit
                 cooperatives. Direct loans are made to construct and maintain the
                 distribution facilities that provide electricity to users. RUS also places
                 guarantees on loans to finance the construction, repair, and improvement
                 of facilities that generate and transmit electricity.

                 During fiscal years 1992 through 1996, RUS made or provided USDA
                 guarantees on 880 electricity loans, which totaled about $4.4 billion. Direct
                 loans accounted for 835 of the total loans and about $3.3 billion of the total
                 loan amount. The other 45 loans, valued at about $1.1 billion, had USDA
                 guarantees. All electricity loans that received USDA repayment guarantees
                 during this 5-year period were made by the Treasury’s Federal Financing

                 RUS’ cost for the electricity loans made during these years totaled about
                 $551 million. This cost consists of two components: (1) federal subsidy
                 costs, which under credit reform (post-fiscal year 1991 credit) includes net
                 present value estimates of the interest costs associated with the loans
                 made at rates below the rate at which RUS borrows from the Treasury,
                 default costs, fees, and other costs and revenues and (2) administrative
                 costs for salaries and other expenses. The subsidy costs totaled about
                 $446 million, and the administrative costs totaled about $105 million.

                 Page 2                                                      GAO/T-RCED-97-198
                                         The outstanding principal on RUS’ direct and guaranteed electricity loans
Financial Condition of                   totaled about $32.3 billion at the end of fiscal year 1996.3 About $8 billion,
RUS’ Electricity Loan                    or almost 25 percent, was owed by 12 borrowers that were delinquent (at
Portfolio                                least 30 days past due on loan repayment) or otherwise in financial
                                         distress. These 12 borrowers made up less than 2 percent of the total
                                         number of RUS’ electricity loan borrowers.

                                         About $618 million of principal was owed by three delinquent borrowers.
                                         These three borrowers, each of which had been delinquent since the
                                         mid-1980s, also owed almost $400 million in unpaid interest. Table 1 shows
                                         the amount of principal owed by all borrowers, and the portion owed by
                                         delinquent borrowers, on electricity loans at the end of fiscal year 1996.

Table 1: Amount of Outstanding
Principal on Electricity Loans Made or   Dollars in millions
Guaranteed by RUS, and Portion Owed                                                                                 Outstanding principal
by Delinquent Borrowers, as of                                                    Outstanding principal              owed by delinquent
September 30, 1996                       Loan type                                owed by all borrowers                       borrowers
                                         RUS’ direct loans                                       $11,475.2                              $ 29.6
                                         Guaranteed Federal                                        13,328.6                              572.0
                                         Financing Bank loans
                                         Other guaranteed loans                                       664.7                               16.3
                                         Restructured loans                                         6,841.1                                     0
                                         Total                                                   $32,309.6                             $617.9
                                          Includes previously issued (1) direct loans made by RUS, (2) guaranteed loans made by the
                                         Federal Financing Bank, (3) guaranteed loans made by commercial lenders on which RUS
                                         agreed to be directly liable for repaying the loan, and (4) loans that had been owed by borrowers
                                         now assumed by other utilities. The amounts cover the principal and the capitalized interest owed
                                         on the loans. The loans in this category are not included in the other direct and guaranteed loan

                                         In addition to the loans held by delinquent borrowers, about $7.4 billion of
                                         the outstanding electricity loan principal at the end of fiscal year 1996 was
                                         also at risk because it was owed by nine other borrowers that, according
                                         to RUS officials, were experiencing financial distress; for example, they
                                         were in bankruptcy or were likely to default on loan repayment in the near
                                         future. Four of these borrowers, owing a total of $5.7 billion, continued to
                                         experience severe financial problems despite having their loans
                                         restructured (the original loan agreements were altered, including revised

                                          The information in this section discusses the outstanding principal on the loans made or guaranteed
                                         by RUS. We have not adjusted the outstanding loan amounts to reflect the allowance for losses that
                                         RUS includes in its financial statements. Also, while borrowers have pledged collateral property as
                                         security for the loans, we did not determine the extent to which such property protects the
                                         government’s investments in the outstanding utility loans.

                                         Page 3                                                                         GAO/T-RCED-97-198
                     repayment schedules and changes in interest rates) at least once during
                     the 1980s or the early part of 1990. Another borrower whose loans had
                     been restructured requested in October 1996 that RUS consider
                     renegotiating its almost $0.6 billion debt because it does not expect to
                     remain financially viable due to increasing competition and a high
                     debt-service expense.

                     RUS has a relatively high dollar amount of problem loans even though it
                     wrote off some borrowers’ debts in recent years. Specifically, RUS wrote
                     off $1,047.4 million for three borrowers from fiscal years 1992 through
                     1996: $13.7 million for one borrower in February 1994, $51.7 million for
                     another borrower in August 1995, and about $982 million for a third
                     borrower in September 1996. (In addition, in the early part of fiscal year
                     1997, one of the problem borrowers discussed above made a lump-sum
                     payment to RUS and, in exchange, the agency forgave slightly more than
                     $500 million of debt.)

                     RUS’ electricity loan portfolio faces the possibility of additional financial
                     stress because of increasing competition among the providers of
                     electricity. For example, competition in the wholesale electricity market is
                     increasing as a result of the legislation that was enacted in the early 1990s,
                     such as the Energy Policy Act of 1992 (P.L. 102-486, Oct. 24, 1992). The act
                     encouraged additional wholesale suppliers to enter the electricity market
                     and provided greater access to other utilities’ transmission lines.

                     For the financial characteristics that we assessed, we found that most of
Financial            the electricity loan borrowers were in a favorable position at the end of
Characteristics of   calendar year 1995. However, some were not.4 Specifically, the
RUS’ Electricity     overwhelming majority of borrowers had positive equity at the end of
                     1995; however, 10 borrowers, or 1.2 percent, had negative equity. Also,
Borrowers            while most made a profit in 1995, 38 borrowers, or 4.4 percent, had a loss.5
                     Furthermore, 12 of the 38 borrowers that had losses in 1995 also had
                     losses in at least 1 year between 1992 and 1994.

                     RUS’ automated files contained financial information for 804 distribution
                     borrowers and 51 power supply borrowers with outstanding electricity
                     loans (direct and/or guaranteed loans) at the end of 1995. On the basis of

                      The information presented in this section on borrowers’ financial characteristics is calendar year data
                     taken from RUS’ databases.
                     RUS refers to the profits made by electricity loan borrowers that are nonprofit cooperatives as “net
                     margins” and to the losses as “deficits in net margins.”

                     Page 4                                                                           GAO/T-RCED-97-198
           the measures we used, which included net worth and net income, we
           found that even though the dollar amount of problem electricity loans was
           relatively large, the problems were concentrated in a small number of
           borrowers. Most electricity loan borrowers had generally favorable
           financial characteristics. For example, the distribution borrowers had
           average assets of $37.4 million, liabilities of $21.6 million, and a net worth
           of $15.8 million. All but five of these borrowers had $1 million or more of
           net worth; however, two had a negative net worth. Overall, the distribution
           borrowers had a total profit of $1 billion, or about $1.3 million on average.
           All but 34, or 4.2 percent, of these borrowers had a profit in 1995.

           In comparison, power supply borrowers had average assets of
           $633 million, liabilities of $622.1 million, and a net worth of $10.9 million.
           Of the power suppliers, 42 had $1 million or more of net worth, but 8 had a
           negative net worth. Overall, the power suppliers had $234 million in total
           profit, or about $4.6 million on average. However, four borrowers, or
           7.8 percent, did not have a profit in 1995.

           Mr. Chairman, this completes my prepared statement. I would be pleased
           to respond to any questions that you or Members of the Committee may

(150732)   Page 5                                                      GAO/T-RCED-97-198
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