Rural Development: Financial Condition of the Rural Utilities Service's
Electricity Loan Portfolio (Testimony, 07/08/97, GAO/T-RCED-97-198).

Pursuant to a congressional request, GAO discussed the Department of
Agriculture's (USDA) Rural Utilities Service's (RUS) electricity loan
program, focusing on the financial: (1) condition of the electricity
loan portfolio; and (2) characteristics of borrowers having electricity
loans.

GAO noted that: (1) the total amount of the outstanding principal on
RUS' electricity loans was $32.3 billion at the end of fiscal year (FY)
1996; (2) 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); (3) these 12 electricity loan borrowers
represent less than 2 percent of the total number of electricity loan
borrowers; (4) this relatively high dollar amount of problem loans exits
even though RUS had written off some borrowers' debts in recent years;
(5) specifically, RUS wrote off almost $1.05 billion in electricity
loans during the 5-year period from FY 1992 through FY 1996; (6) the
financial characteristics for most of the borrowers were favorable, but
some were not; and (7) the year-end reports from the borrowers to RUS
showed: (a) almost 99 percent of the 855 electricity loan borrowers had
positive equity at the end of 1995; (b) a total of 841 borrowers had
equity of $1 million or more; (c) about 96 percent of the 855
electricity loan borrowers made a profit in 1995; (d) a total of 789
borrowers made a profit of $100,000 or more; (e) however, 10 electricity
loan borrowers had negative equity at the end of 1995; and (f) 38
electricity loan borrowers did not make a profit in 1995.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  T-RCED-97-198
     TITLE:  Rural Development: Financial Condition of the Rural 
             Utilities Service's Electricity Loan Portfolio
      DATE:  07/08/97
   SUBJECT:  Direct loans
             Electric utilities
             Rural economic development
             Government guaranteed loans
             Financial management
             Delinquent loans
             Profits

             
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Cover
================================================================ COVER


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

For Release
on Delivery
Expected at
9 a.m.  EDT
Tuesday
July 8, 1997

RURAL DEVELOPMENT - 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

GAO/T-RCED-97-198

GAO/RCED-97-198T


(150732)


Abbreviations
=============================================================== ABBREV

  USDA -
  RUS -

============================================================ Chapter 0

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 more. 

  -- 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. 


--------------------
\1 Rural Development:  Financial Condition of the Rural Utilities
Service's Loan Portfolio (GAO/RCED-97-82, Apr.  11, 1997). 

\2 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. 


   BACKGROUND
---------------------------------------------------------- Chapter 0:1

USDA is the federal government's principal provider of loans used to
assist 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 Bank. 

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. 


   FINANCIAL CONDITION OF RUS'
   ELECTRICITY LOAN PORTFOLIO
---------------------------------------------------------- Chapter 0:2

The outstanding principal on RUS' direct and guaranteed electricity
loans totaled about $32.3 billion at the end of fiscal year 1996.\3
About $8 billion, or almost 25 percent, was owed by 12 borrowers that
were delinquent (at 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 Guaranteed by
                  RUS, and Portion Owed by Delinquent
                  Borrowers, as of September 30, 1996

                         (Dollars in millions)

                                                           Outstanding
                                       Outstanding   principal owed by
                                 principal owed by          delinquent
Loan type                            all borrowers           borrowers
------------------------------  ------------------  ------------------
RUS' direct loans                        $11,475.2              $ 29.6
Guaranteed Federal Financing              13,328.6               572.0
 Bank loans
Other guaranteed loans                       664.7                16.3
Restructured loans\a                       6,841.1                   0
======================================================================
Total                                    $32,309.6              $617.9
----------------------------------------------------------------------
\a 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 categories. 

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 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. 


--------------------
\3 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. 


   FINANCIAL CHARACTERISTICS OF
   RUS' ELECTRICITY BORROWERS
---------------------------------------------------------- Chapter 0:3

For the financial characteristics that we assessed, we found that
most of the electricity loan borrowers were in a favorable position
at the end of calendar year 1995.  However, some were not.\4
Specifically, the overwhelming majority of borrowers had positive
equity at the end of 1995; however, 10 borrowers, or 1.2 percent, had
negative equity.  Also, 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 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. 


--------------------
\4 The information presented in this section on borrowers' financial
characteristics is calendar year data taken from RUS' databases. 

\5 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."


-------------------------------------------------------- Chapter 0:3.1

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


*** End of document. ***